THE BEAR'S
LAIR Government in the
way By Martin Hutchinson
My old friend and former colleague Martin
Sieff has produced a splendid riposte to Thomas
Friedman's The World is Flat and That
Used to Be Us - entitled That Should Still
Be Us . [1] Yet while I agree with much of
Sieff's critique of the Friedman worldview, I
can't help thinking he falls into the same trap -
the unfortunate tendency of economists and other
commentators, when producing solutions to the
world's problems, to assume that those solutions
should be implemented by a benign government.
In reality, government is far more often
the problem than the solution, and the optimum
answer in a complex world is to figure out how to
get it out of the way.
Friedman's
worldview is well worth criticizing. It centers on
admiration for China's
undoubted achievements and a wish that we could
have a government so well attuned to the country's
needs. It ignores not only China's manifold
human-rights abuses but also the major
inefficiencies in China's system, in particular
the gigantic tsunami of real estate overbuilding
and banking system bad debts.
Friedman's
work also asserts obvious falsehoods, well pointed
out by Sieff; for example that China is engaging
in a massive expansion of solar power for its own
use, when in reality the highly efficient Chinese
solar cell manufacturers get most of their
business from foolishly subsidized Western users.
As Sieff emphasizes, the Friedman
worldview also assumes that trade and investment
barriers worldwide are lowering all the time, so
that we need not worry about the drain of jobs
overseas, but instead can revel in a US future in
which the tech sector and service industries
employ most of America's people.
The
problem comes with Sieff's alternative to
Friedman's worldview. He asserts rightly that
China cheats on international agreements, then
from that leaps to the view that we should revert
to protectionism, which as he correctly points out
was the US tradition until the Kennedy Round of
trade talks in the 1960s.
However, much of
the early US success was built up in the era of
British unilateral trade disarmament from 1846 to
1932, for example enabling the United States, not
Britain, to build up a mighty steel industry using
processes developed by the British Henry Bessemer.
Given that our trading partners will not
allow us to abrogate trade agreements without
retaliation, a reversion to protectionism would
simply bring a return to the beggar-my-neighbor
policies of the 1930s Smoot-Hawley Tariff. That
resulted in an immense depression for the United
States, though not for Britain - which in that
decade pursued policies of modest trade barriers
and small government that were almost fully
optimal in the circumstances.
Contrary to
Sieff's assertion, David Ricardo's Doctrine of
Comparative Advantage is not an outmoded
candlepower-era dogma, but remains mostly true,
with the few exceptions of those businesses such
as software where carrying on the trade on an
outsourced basis gives the outsourcee all the
resources it needs to become more competitive than
the outsourcer.
Raising tariffs is a
negative-sum game, unless competitors are as
foolish as 19th century Britain. However,
governments must raise revenue somehow, and so the
extreme free trade position is also nonsense,
since it puts all the burden of taxation on the
unfortunate income earners, causing major economic
distortions when tax rates rise to high levels.
The solution is a worldwide regime of moderate
tariffs, providing modest preference for domestic
over foreign manufacturers and substantial
revenues for the ever-greedy government maw.
On energy, Friedman assumes that high
energy costs are good for the United States, and
that over time we should move to non-traditional
sources such as solar, wind and biomass. Here
Sieff is entirely sound in demolishing the idea
that high energy prices are in any way good for US
living standards. He correctly demolishes the idea
of state subsidies for alternative energy, then
reverses himself oddly, first to claim that global
warming is real, based on a trip to an unusually
warm Siberia, and then to claim that the Chevy
Volt, another hugely subsidized boondoggle, is the
solution to our energy problems.
The real
solution to our energy problems lies as always in
the private sector, in this case with fracking
technology, which is admirably suited to the
small-scale enterprise at which the US excels. It
now looks as though at least natural gas and
possibly oil will be considerably cheaper in the
United States than elsewhere in the world, with
the main problem in the case of gas being
transportation.
The solution to the latter
is not pipelines but local production: situate
high-energy-usage plants near plentiful natural
gas sources, and the cheap natural gas can be
exported in the form of highly competitive
widgets. Once again, Pennsylvania, Ohio and
upstate New York can become the workshops of the
world, while the Middle East can be ignored by a
scaled-back US military and foreign policy
establishment and left to its own unpleasant
devices.
Outside Siberia, other parts of
the world have seen cooling, with an expansion of
the Antarctic ice cap, for example, so global
warming, if real (as it hasn't been for the past
decade), is at most a modest problem that can be
solved over time by the private sector with no
more than an occasional carbon-tax nudge if
needed. Of alternative energy sources, corn-based
ethanol has been a complete waste of money (as
Sieff rightly points out) as has wind, but solar
is close to being viable at today's prices -
though with the fracking revolution it may well be
a case of "close, but no cigar".
Sieff
correctly identifies excessive world population as
the principal danger to our environment and
resources, but his solution of an autarkic
government-led resource and trade policy wouldn't
solve the problem - indeed it might make it worse
if resulting Third World poverty increased
fertility levels further.
However,
Friedman is indeed excessively Panglossian; the
fine examples of negative population growth of
Japan, Germany and Italy should be held up as
models, and international resources should be
devoted to reducing poverty-driven fertility.
Monetary policy is an area Sieff largely
ignores (and Friedman is on the wrong side of).
The US will be richer than other countries, not
through protectionism but through ensuring that
its capital is both more plentiful and more
efficiently matched with labor than in other
societies. This requires a high savings rate, to
replenish the stock of US capital that has become
sadly depleted, which in turn requires high
interest rates, well above the level of inflation.
The accelerating decline in US hegemony
can almost entirely be placed at the door of the
post-1995 Federal Reserve and its appalling
over-expansion of the US money supply. By this
policy, the Fed has thrown away the United States'
main source of comparative advantage over emerging
markets: its cheap and readily available capital.
Because of low domestic returns,
corporations are sitting on record cash hordes
while the government fritters away over $1
trillion annually in borrowed money. Naturally,
global capital flows mostly to emerging markets,
reducing their capital costs and allowing them to
use their labor cost advantage to put US
manufacturing out of business.
Both Sieff
and Friedman go wrong in one respect: they both
have faith in a powerful government - Sieff's
heroes are Abraham Lincoln and Franklin Roosevelt,
neither in my pantheon. This is a frequent problem
with commentators seeking to solve economic
problems; they assume a benign government
manipulating the economy's levers.
In
practice, public choice considerations dictate
that government officials serve their own
interests, not those of the economy as a whole,
and so powerful governments are the principal
impediment to economic prosperity. Jean-Baptiste
Colbert's policies in Louis XIV's France produced
the economic decline of the ancien regime, while
free-market policies in Britain did the opposite
(thereby allowing the smaller Britain to whip
France's ass in war after war through the 18th
century).
More recently, there is
considerable evidence that the surge in US
government regulation, particularly environmental,
from about 1970 on is largely responsible for the
sharp decline in US productivity growth after 1973
and hence for the relative impoverishment of the
US middle classes. Government is the problem, not
the solution, and should be cut back as far as
possible. Economic development should be left to
the private sector, not treated as a game of
"Diplomacy" between meddling governments.
Finally, Sieff identifies a further highly
important policy problem, that of patents. US
patents have traditionally been awarded to the
inventor of a new idea, but a 2011 modification to
patent law instead awards patents to those filing
first. Combined with 1990s reforms that made
patent information excessively open to
competitors, this has tilted the playing field
heavily against small businesses, the main sources
of innovation.
The principal use of a
patent system is to protect small companies from
their ideas being stolen by larger competitors;
modern US patent law acts primarily as a
protection for entrenched interests.
One
could wish that Sieff were more skeptical about
the benignity of government, and less fearful of
free international trade. His "round"
protectionism is as unconvincing as Friedman's
"flat" globaloney. In reality, the economic world
is more topologically complex than either imagines
- maybe a doughnut with multiple holes. But as a
demolition of fashionable nostrums, Sieff's book
is compelling reading.
Note 1. That Should
Still Be Us: How Thomas Friedman's Flat World
Myths Are Keeping Us Flat on Our Backs by
Marin Sieff. (Wiley, 2012). ISBN-10: 1118197666.
Price US$22.95, 224 pages.
Martin
Hutchinson is the author of Great
Conservatives (Academica Press, 2005) - details
can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
