[Ed note: Continuing for the rest of this week, we’ll publish some of the best recent articles from the guys over at our sibling free e-letter, The Daily Reckoning. As mentioned yesterday, they take a different view on the market.
The Daily Reckoning editors look at the big picture view of the economy and analyse the impact of central bank monetary policy on the value of assets and money. As they see it, these policies have resulted in an almighty asset bubble which will lead to a devastating crash. You’ve read our view; now it’s time to consider the other side. Following is an essay from Greg Canavan, first printed in The Daily Reckoning on 19 June 2013…]
Australian car maker, Holden, is in a powerful negotiating position. The car maker is threatening to close its manufacturing plant in Adelaide unless it can cut costs by $18 million per year. The cost target equates to a pay cut of around $200 per week for Holden’s workers, which is not something the Australian government or the unions will allow to happen.
Its local manufacturing operations are loss-making, and that’s after receiving government assistance. It wants to be able to move back into profitability or leave, threating not just its 1,700 employees but the whole car manufacturing industry.
Taxpayers have given Holden a total of $2.17 billion in ‘co-investment’ funds since 2001 but the company still can’t make a profit. It’s not just Holden; the problems are structural. High labour costs, poor productivity relative to the cost of labour and a high dollar are all part of the problem.
This begs the question, should Australia try to maintain a local car-making industry when it can’t make money doing so?
The free-market answer is no it shouldn’t. If you have a whole bunch of national resources aimed at producing a good that doesn’t actually create any profit or wealth, or doesn’t create a long term return above its cost of capital, then those resources should be directed towards more productive enterprises.
But free-market thinking only exits in text-books. In the real world you have vested interests and governments interfering in the market mechanism. And while we have sympathy for the view that governments should temper the vagaries of the markets, we have absolutely no faith in it being able to do so adequately and dispassionately. Anyway, who measures the ‘adequacy’ of any intervention?
So instead you get a situation where governments counter the harsh but necessary adjustments created by the market with misguided and one-dimensional responses.
Peter Roberts argued recently in the Australian Financial Review that if Holden pulled up stumps and left, it would be ‘catastrophic’ for the Australian economy. It would lead to an exodus of car makers, with ‘44,000 direct car-making jobs lost immediately and perhaps three times that number in supporting industry.’
That sounds pretty grim. After all, many industries, from the steel makers to the parts suppliers, rely on the car industry to make a living.
But if the government had not provided such large assistance payments over the years, and the car makers wound down their manufacturing facilities, would such a large support network exist? The resources (labour and capital) currently devoted to supplying the car industry would have, by economic necessity, looked elsewhere for their sustenance.
And if those resources instead went into productive enterprise, the long term wealth created would be much better for the country. There would be no need for government subsidies, and the returns received by the new enterprises’ (in excess of their cost of capital) would represent the accumulation of real wealth.
But in its well intentioned effort to create jobs and maintain a manufacturing presence, the government has inadvertently created a very large work force almost entirely dependent on its continuing assistance payments. And while parts of that work force may be highly productive, they’re still feeding off an unproductive economic carcass.
Overall, that’s bad for the Australian economy. But the interventionist view says the government is right to support an unprofitable industry because it keeps people in jobs. And to any half-caring person, especially those with kids or dependents, maintaining jobs is a worthy political goal.
That’s why the interventionist view is so seductive. And if you pooh-pooh it, you’re just a heartless, right-wing, George Bush loving a-hole who only cares about profits.
But the free-marketer says it’s not the government’s role to create jobs. That’s what entrepreneurs are for. The government is there to do as little as possible and make sure conditions are ripe for entrepreneurs to succeed…to create productive jobs and wealth, which, if redistributed via that old notion of philanthropy, creates a more prosperous and independent society.
In short, free marketers realise that government subsidies, no matter how well intentioned, create distortions and is ultimately detrimental to a society’s wealth.
But the flaw with the free market view is that it fails to take humans into account. It expects politicians to not be politicians. And it expects business to be more chivalrous than it really is.
So we’re stuck with the seductive view…the view that governments, central banks, and whoever is handing out wads of someone else’s cash really are doing the right thing.
Well, if you want to be seduced, go right ahead. But understand that the more interference you have, the more wealth destruction happens under the surface. It’s not immediately apparent, but one day, and all of a sudden, the market will face a ‘Holden’ moment, which will threaten the entire underlying infrastructure.
Greg Canavan+
Editor, The Daily Reckoning Australia
[Ed Note: To read more of Greg’s in depth macro-economic analysis, click here to subscribe to the free daily e-letter The Daily Reckoning.]
From the Archives…
The Power of Low Interest Rates Coming to the Aussie Market
5-07-2013 – Kris Sayce
S+P 500 Downtrend Looms? Counting Down The Days…
4-07-2013 – Murray Dawes
Here’s Your Six-Point Stock Buying Checklist
3-07-2013 – Kris Sayce
Are the Credit Rating Agencies at it Again?
2-07-2013 – Kris Sayce
Why This Could be Another Great Year for Australian Stocks…
1-07-2013 – Kris Sayce