Who Might Run Industrial Policy?

It has been a while since I have last written a post, and the choice of subject matter for this post has proven to be a difficult decision. On the one hand, there is the ongoing tremors in the financial system, and on the other there are the global shifts, such as the unsubstantiated suggestion by China that they may allow the RMB to appreciate. Added to this, there is the ongoing ascent of the gold price, as investors and governments move into the asset of last resort, and the progressive decline in value of the $US. This from the Wall Street Times:

"The gold market is kind of surprising here," as it holds on to the psychologically important $1,100 level, said Ralph Preston, senior market analyst with Heritage West Financial.

Watching the dollar's next moves will be crucial, Preston said. "It's going to be interesting whether the dollar is developing a bottoming formation or if it is about to fall off a technical cliff."

I will leave such matters alone for this post, as they are being covered elsewhere. Instead I would like to focus on one of the widely utilised government stimuli; the cash for clunkers schemes. I am focusing on this subject, as the scheme has appeared to give a temporary reprieve in the downwards trajectory of many economies. My inspiration was an article in the Telegraph, in which Jeremy Warner analyses the impact of the stimulus on the UK economy.

The purpose of my post is to highlight the absolute foolishness of such government measures in relation to arguments for more government interventions in economies. A long while ago, in a discussion of GDP measures, I pointed out that Hurricane Katrina would have seen an uptick in US GDP. The destruction of infrastructure, housing and other assets would have led to increased activity in the economy, as business and government sought to replace the assets that were lost. In other words, the destruction of a hurricane would appear to be a positive boon for an economy. On such logic, bombing your own cities would be good for the economy.

As it is, we have seen a natural disaster replaced with a man made disaster. Each of the cars that has been scrapped early is an asset with a real value, and useful life. Just as a bridge being destroyed in a hurricane still has a useful potential lifespan, the same might be said of the cars that have been scrapped. Quite simply, the result is just the same.

In some ways it is an identical process to running a production line with a garbage compactor at the end of the production line. As each unit comes off the production line, the compactor simply crushes the item. The result of such a measure would be that the demand for the item might never be met, and the production line would be kept endlessly busy. Output would be maintained, GDP figures would be positive, and the economy would apparently be doing well as the result of this ongoing activity.

What I am discussing is not particularly original, and many other commentators have made similar observations. On this occasion, I am reiterating the point due to comments on my previous post. One of the regular commentators, writing under the name of Lord Keynes, made a robust defence of government intervention in the economy, proposing that governments develop industrial policy. What followed was a heated debate about the relative merits of government interventions, with both sides of the debate arguing their points vigorously.

In light of this debate, the purpose of this post is very simple. I have outlined the principles of a government policy, adopted in many countries, which is just a process of destroying useful assets - governments destroying something and suggesting that this is good for the economy. These governments include the same people in whom Lord Keynes appears to profess so much faith. These masters of our economic destiny actually think that premature destruction of assets is good for an economy. These are people who would count Hurricane Katrina as having had a positive impact upon an economy. Few would say such a thing directly (though I do recall that the Economist magazine came close to actually saying it), but they would see the positive GDP growth from the activity from Katrina as a 'good thing'.

My question is very simple. How can anyone have faith in these people? It is extraordinary that anyone might have faith in people with such bizarre beliefs. Really, can we trust these people with the widespread interventions in the economy, as proposed by Lord Keynes? The very same people who instigated the cash for clunkers policy would be the same people who would devise 'industrial policy'. Lord Keynes is not alone in having such faith in government interventions, and the worry is that those with his views are gaining ground. The advocates of ever more interventions, ever more shift of resource into government hands, are becoming ever more plentiful. That such beliefs are gaining ground is a real cause for worry.