Government Does Not Know Better (Or Even As Well)

by Don Boudreaux on January 25, 2009

in Complexity & Emergence, Current Affairs, Great Depression, Hubris and humility, Seen and Unseen, The Profit Motive

Economist Bill Shughart (a former GMU colleague, by the way) has this excellent op-ed in today's Washington Times; it's on the folly of even small-scale government 'industrial policy.'  Here are Bill's concluding paragraphs:

The truth is: It is not government's function to create jobs. Putting
people to work is easy, as demonstrated by Franklin D. Roosevelt's
Depression-era Works Progress Administration (WPA), more accurately
known as "WPA: We Piddle Around." The bigger challenge is to create
wealth. Toyota failed to foresee the economic events that caused its
expansion plans to unravel.

Keep this in mind when Congress and the White House are selecting economic stimulus projects to fund this year.

If highly successful private firms like Toyota – with their
extraordinary market research and years of savvy and experience -
sometimes embark on projects that turn sour, how can we expect
politicians, most of whom have no such business know-how, to pick
winners?

There is a difference, however. Companies usually risk their own money. In Washington, the politicians will be risking ours.

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{ 24 comments }

Lee Kelly January 25, 2009 at 5:39 pm

Suppose that you were approached to invest in a new company.

After some investigation, you discover that the manager has no experience, huge debts, and frequently lies. He never monitors profits, his career may benefit from corruption, and he is not personally liable for any losses.

It would be smarter to invest in sub-prime mortgages than in such a company! Or better yet, nothing at all.

It would be disastrous for an economy if the government subsidised such a company using taxpayers money, wouldn't it?

dg lesvic January 25, 2009 at 6:25 pm

Another great post, Kelly.

RickC January 25, 2009 at 8:25 pm

I second dg's comment on Kelly's post.

indiana jim January 25, 2009 at 9:04 pm

WPA doesn't stand for "we piddled around", better, it stands for "wealth pissed away."

muirgeo January 25, 2009 at 9:30 pm

"If highly successful private firms like Toyota – with their extraordinary market research and years of savvy and experience – sometimes embark on projects that turn sour, how can we expect politicians, most of whom have no such business know-how, to pick winners?"

I'm guessing this guy doesn't know the early history of how Toyota got started, government subsidies and protectionist policies.

From;

As Ha-Joon Chang points out in his brilliant book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism," in 1933 a clothing manufacturing company decided to branch out into the manufacture of automobiles. They had everything going against them – their nation had no really serious domestic auto industry, the company had no experience with the product, and other nations (particularly the US and Great Britain) were already making world-class vehicles that had captured most of the world's markets.

But the company caught the imagination of its country's leadership, and a ministry of trade decided to help it along. Government subsidies helped the company develop their first car. Decades of high import tariffs protected it from foreign competition as it grew into a serious contender. Domestic content laws both made sure the company used parts made within the country, and also guaranteed that domestic competitors would have to, thus building a strong base of domestic companies supportive of an auto industry, from tires to plastic components to precision machine tools and electronics.

In 1939 the country even kicked out both GM and Ford from sales within the country, and the nation's single wholly-owned bank bailed out the struggling textile manufacturer as it moved relentlessly forward in the development of an automobile.

That company, originally known as The Toyoda Automatic Loom Company, is today known as Toyota, and manufactures the infamous Lexus that Tom Friedman mistakenly thought was successful because the world is "flat" and trade is "free." In fact, the success of the Lexus (and the Prius and every other Toyota) is entirely traceable to massive government intervention in the markets by Japan over a fifty-year period that continues to this very day.

True_Liberal January 25, 2009 at 9:39 pm

Suppose you went to a bank, and asked to borrow money to create jobs. And suppose you needed $200K+ per job created.

How long would the loan officer laugh?

True_Liberal January 25, 2009 at 9:43 pm

What if I were to visit a bank and request a loan "to create jobs", and needed $200K+ per job created?

How long would the loan officer laugh?

Lee Kelly January 25, 2009 at 11:28 pm

muirgeo,

Excellent example. Japan would have been better off without government "investment". But, for better or worse, Toyota is here now; there can be no undoing of past mistakes. Let us hope that the Japanese government does not impose a similar burden on its people again.

Sam Grove January 25, 2009 at 11:32 pm

But Toyota is now a private firm and does make mistake and loses money when it does so.
Do you think the government should bail it out from such errors?

Chris O'Leary January 26, 2009 at 12:17 am

"But the company caught the imagination of its country's leadership, and a ministry of trade decided to help it along. Government subsidies helped the company develop their first car. Decades of high import tariffs protected it from foreign competition as it grew into a serious contender. Domestic content laws both made sure the company used parts made within the country, and also guaranteed that domestic competitors would have to, thus building a strong base of domestic companies supportive of an auto industry, from tires to plastic components to precision machine tools and electronics."

And Honda ran afoul of the government and was almost hounded to death, and was forced to look to the U.S. for growth, as the government tried to pick winners in the domestic auto industry.

Also, Japan's vaunted Fifth Generation Computing initiative really worked out, right?

"In fact, the success of the Lexus (and the Prius and every other Toyota) is entirely traceable to massive government intervention in the markets by Japan over a fifty-year period that continues to this very day."

So the brilliant design and engineering are irrelevant?

dg lesvic January 26, 2009 at 12:44 am

I go back to the days, and, of course, further back than that, when the only Japanese vehicles on the road were little Datsun (Nissan) pick-ups and Toyota put puts. Then Toyota came out "za new hot one," the Toyota Corona, with a four cylinder engine doing 0 to 60 in 16 seconds, at at time when Volkswagon dominated the road, at 0 to 60 in several days. I was one of the first in LA to buy one. The price, $1650, including tax and license. The main selling point, for me, at least: the sight of a lovely Japanese girl behind the wheel of a lovely little mint green model. That's for me, I thought, without too much distinction between the car and the girl.

There were so few of us Toyota drivers on the road back then that we all waved to one another.

And, years before Honda sold a car in California, and was selling only motorcyles, I spotted a Honda road test car in Inglewood.

The first Honda cars were sold at the Bill Robertson Honda motorcycle dealership on Lankershim Boulevard in North Hollywood.

When I told my then little boy, now a big boy with a little boy of his own, that Mr Honda himself came to the grand opening, he asked, "Did he buy a car?"

Gil January 26, 2009 at 1:12 am

Gadzooks! Wasn't any car company not subsidised by government? Does this mean Sam Grove was right and the automobile and the road system (deemed a natural monopoly and therefore to be provided by government) would never have come to be?

Sam Grove January 26, 2009 at 1:59 am

The government highway system was certainly a boon to the automobile industry and really put the hurts on railroads.

How can we have personal flying cars when so much of our wealth has been poured into highways?

Gil January 26, 2009 at 2:16 am

What stopping people from acquiring helicopters and autogyros (apart from the price)? I've seen the odd farmer on TV use an autogyro.

Perry Eidelbus January 26, 2009 at 10:53 am

Most people, particularly muirgeo, are unaware of how the first Japanese cars exported to the U.S. were infamously bad. Remember, dg? I wasn't around, but my father used to tell me about how he hated the Corolla his company gave him in the Philippines, and that he couldn't wait to trade it in for a nice, big Ford.

Even with the subsidies, Japanese automakers couldn't compete until their products' reliability increased drastically. It was much the same with anything the Japanese made, hence the line in "Back to the Future III" where the 1955 Doc Brown said, "No wonder this circuit failed. It says 'Made in Japan'."

Subsidies didn't allow Toyota to eventually produce their modern selection. Subsidies allowed Toyota to continually postpone producing reliable cars. As with all situations where an industry is "protected" by government, they'd have had to be much more competitive much sooner.

Perry Eidelbus January 26, 2009 at 11:05 am

Gil, it's highly likely I'd eventually trust my own abilities to maneuver a flying aircraft. What's stopping me, however, is my voluntarily choice NOT to share airlanes with all the idiots out there.

My wife, mother and aunt were run off an interstate two weeks ago. They could have been killed except for a lucky snow-filled ditch that stopped them. Think of the tens of thousands of people who aren't as lucky to survive car accidents, or the millions who suffer injuries. As a friend has put it, it's bad enough in two dimensions — do you really want three?

Sam Grove January 26, 2009 at 12:48 pm

As a friend has put it, it's bad enough in two dimensions — do you really want three?

That's one way to look at it. Another way is to realize you are confined to drive within a few feet of unknown danger. In three dimensions, there's a lot more room.

I also think that a lot more people would shy from flying than do from driving. I also expect there would be a lot of commercial short distance carriers with highly skilled "drivers", and perhaps more rail carriers not having suffered the loss of customers to highways.

Sam Grove January 26, 2009 at 12:50 pm

How can we have personal flying cars when so much of our wealth has been poured into highways?

Posted by: Sam Grove | Jan 26, 2009 1:59:24 AM

What stopping people from acquiring helicopters and autogyros (apart from the price)?

My point remade.

dg lesvic January 26, 2009 at 1:57 pm

Perry Eidelbus,

The Japanese car I bought was the first Corona. I believe that the little put-put before that was called Toyopet (Toyopetto).

The Corona was an instant hit, and pretty much all Japanese cars, including the Corolla, the one you mentioned unfavorably, and all the other Japanese products from them that time on, were renowned for quality and reliability.

Perry Eidelbus January 26, 2009 at 2:50 pm

Come to think of it, it may have been a Corona my father had, not a Corolla. I should have clarified, his main complaints were the lack of power and internal room/styling. It was still fundamentally a matter of the car not being up to what Americans wanted.

Nonetheless, my point stands, as even the Corona didn't come out until the late 1950s. The Japanese auto industry, among others, would have found it necessary to produce reliable vehicles earlier than they did, except that they had the benefit of government protection. Buying something Japanese was just not a good idea in the 1950s.

Later on, the cars may have been more reliable, but the subsidies made them artificially cheaper in Asian export markets such as the Philippines, where people might have otherwise preferred American or German cars. A company looking to buy a sedan for an exec would then look at a Corona or Corolla, rather than an LTD.

Perry Eidelbus January 26, 2009 at 3:00 pm

In three dimensions, there's a lot more room.

That's true, although being the cynic I am, that's another dimension for people to come at you from nowhere. The aforementioned idiot was trying to merge from an on-ramp; it was hard enough for my mother to try to avoid him in two dimensions. If such a collision occurs in three, there unfortunately won't be any snowbanks in mid-air, and such a situation would pose grave danger for anyone preferring to travel along the ground in two dimensions.

True_Liberal January 26, 2009 at 4:52 pm

"In three dimensions, there's a lot more room."

Yes there is, as was amply demonstrated in a near-headon collision between two jets in Brazil over a year ago.

Two jets were placed on a collision course by Air Traffic Control. This would have probably been a near-miss a few years ago, simply because navigation was not that perfect. The two would have passed a few hundred yards apart, at a closing speed of 1100 mph, but no harm done.

But today's navigation is so precise that the two were only maybe 20 yards apart, centerline-to-centerline, and thus THREE dimensions had been reduced to nearly ONE. As the two passed, one (the smaller jet) sliced off one-third of the other's left wing, causing it to crash taking 150 +/- lives.

Reducing the number of dimensions indeed increases the risk.

Perry Eidelbus January 27, 2009 at 10:17 am

That crash was actually a very extreme case. The tower incompetently put the two planes on a collision course; the pilots really were doing just what they were told. Moreover, the Embraer apparently had a malfunctioning transponder, so the other plane couldn't detect and avoid it.

Your comparison is additionally not apt because flying car traffic will be far more dense than modern air lanes. How do you pull over quickly when the "Check engine" light goes on? What about stalled cars? People who chase after you because of road rage? You are correct to say that reducing dimensions to one will dramatically increase danger, but that's about it. Once again, a third dimension may offer you another direction of escape, but it can just as easily be another direction for someone to come at you.

Further consider that the collision in Brazil was despite the pilots' training and reflexes. They were flying too fast to see each other until too late. Most Americans are incompetent enough on the roads, paying little heed to the few instruments. How about several times the speed and with far more instruments?

I surely am not the only one who doesn't relish the idea of someone crashing down on me, whether at home or work or traveling, because he was too stupid to operate a complex machine.

Mesa Econoguy January 30, 2009 at 7:54 pm

Once again, more muirgeo economic amateurism.

1) Japan’s MITI is widely regarded as a major contributor to the disastrous 1990s Japanese economy (which lasted into 2005), along with the keiretsu system of interlocking directorates (which we have laws against), if which Toytota is a major participant.

2) we now find our own economy in a similar precarious position, for the exact same reasons.

Selective stupidity is not a bolstering argument.

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