Gongol.com Archives: September 2013
Brian Gongol

September 13, 2013

Socialism Doesn't Work When the quest for manufacturing jobs goes wacky
France is headed for a more state-interventionist economy, if the government gets its way. State-interventionism tends to contaminate any market economy, but its effects are more subdued in emerging economies (like in Singapore or South Korea, 50 years ago). But in a mature economy like France? Sounds like a recipe for boondoggles, waste, and corruption. It's quite lovely that the political class there wants to dream of creating a "third industrial revolution", but the people who actually create industrial revolutions aren't working for the state. ■ The best thing a country can do if the political leadership wants certain technological innovations (like the 34 projects they'll pursue in France) is to establish inducement prizes (or, perhaps they could better be called "innovation prizes") that concentrate the rewards for actually delivering on those innovations. Governments ought to be largely agnostic about the exact steps involved in getting expensive things with public funding. Trying to micromanage a macro-economy is a really good way to demonstrate foolishness. Instead, define carefully what you want and decide precisely what it's worth to you, then publicize the prize and stay out of the way. That's how the X Prizes work. (And they really do work.) ■ Understand that for government to concentrate benefits around any particular result distorts the market -- but if there are enough benefits to the result, say, in the form of public goods, then that distortion may be worthwhile. But distorting through micromanagement and rough-edged "industrial policy" is a great way to waste the taxes taken from hard-working people. ■ France's problem is a really high unemployment rate. That, quite often, is a symptom of an economy with too little labor mobility and too many regulations on employment. (For an American counterpart to this problem, compare the experiences of the heavily-unionized automakers with the non-unionized ones. Sure, the unionized ones promised lots of benefits to the workers, but the companies' promises exceeded their capacities, and two of them went broke. The non-unionized ones had more flexibility to shrink when needed and to grow when needed, making them more nimble and thus more capable of taking advantage of shifts in the market. And thus Toyota is hiring and expanding in a big way inside the US, while the US and Canadian governments are only now getting around to backing out of owning (that is, propping up) GM. ■ It's far more defensible for small, developing countries to try a coordinated industrial policy, but to do so requires that the politicians have the wisdom and self-restraint to pull away the "punch bowl" of government protection once the party starts to heat up. South Korea used the government protection of the chaebol to spur industrialization. But the protections outlasted their usefulness, and caused the chaebol to become sclerotic and hazardous to the health of the nation's economy as a whole. The last decade or more has been spent trying to rein in the chaebol so the rest of the economy can flourish. Any government considering an interventionist industrial policy needs to think twice.

Business and Finance Does pent-up demand beat rising interest rates?
Mortgage interest rates have risen and will probably continue to rise -- but they're still at incomprehensible lows, from a historical standpoint. So will rising rates be offset by demand that's been pent-up as people left homeownership? Seems like the demand-side issue will probably be market-specific, while the interest rates will have a more universal impact.