Governments, competition and subsidies

Is it legitimate for city governments to get involved in the economy as The Economist reports a number of mayors are doing?  Governments have been involved in their economies for millenia.  For us this involvement helps a some people make profits and when the economy is tough it helps a few people get jobs.

There are two ways governments get involved in economics – by passing legislation that restricts competition and by giving subsidies either in cash or tax exemptions.

Most economic legislation at the national level works to restrict competition. Patents, copyright, licensing and tariffs all limit competition and allow the firms protected to charge higher prices and make profits they would not otherwise have had.  It may be the most  valuable business skill is government relations and lobbying.  During the recent golden age of prosperity with constant economic growth the higher prices have hardly been noticeable and for most people not relevant.  As we go into a period of economic decline already lot of people are hurting.

The other way governments influence the economy is with subsidies or tax exemptions.  

There are three concerns about government involvement in the economy.  

The first is that protection from competition and subsidies distort prices and encourage inefficiencies in the economy.  It might be cheaper and more efficient to make wing nuts in one place but subsidies alter that.  It may be that competition is now to determine  which, city or state/province has the deepest pockets for providing subsidies.  When firms can go where they get the largest subsidy, there is an element of blackmail and it is not clear this is a good way to start a relationship.

The second concern is that most of us most of the time make decisions for our own short-term interests rather than the long-term interests of the community.  For most of us a job today is more important than the future health of the planet or even survival of the human race.  Also one has to suspect that in this respect politicians are at the head of the line especially when they want to get reelected.

A third concern is that subsidies are good at providing jobs for a lucky few people but provide no benefit for the rest of the unemployed.  I believe subsides should be given to consumers rather than producers so that they don’t distort prices and can provide assistance to all who need it.

DI_404_SUCKZ_Stephen_HarperOne can make lots of arguments against government involvement in the economy, but one is fighting a lot of short-term interests.  The Canadian prime minister is the chief executive officer of corporate Canada.  This applies to the incumbent and probably to most past and holders of that post.

Immigration to solve economic problems?

One has to challenge the idea that rich countries need immigration to improve public finances and to meet the needs of an aging population.  This argument surfaces from time to time in Canada and is now being promoted by the UK’s Office of Budget Responsibility.  The problem is that some people make two major mistakes in economic analysis.  They analyze economic problems in financial terms and they assume economic growth will continue forever.

jetxee_people_near_a_blackboardWhen my economics professors stood at the blackboards they often drew an x-shaped graph.  For the macro economists one line represented the financial aspect of the economy and the other the real or physical aspect.  It is an important distinction and one that is forgotten when we get away from the blackboard.  Ultimately the economy depends upon the resources we use to look after ourselves.  To analyse the economy we need to be aware of what agricultural, energy and mineral resources we have with which to work.

We have problems using financial terms because of the way in which we create money.  It is a sort of Ponzi scheme which collapses from time to time.  Also the purchasing power of any sum of money varies because of inflation or deflation.  Thus it is difficult to use financial terms to evaluate what is happening on the real side of the economy.

Another problem with claims we need immigration to pay our bills is the assumption that economic growth will continue forever and that population drives economic growth.

It is certainly a big mistake to assume economic growth can continue forever.  We have used the most easily accessible agricultural,  energy and mineral resources and it takes more energy to retrieve those remaining.  We see this in increasing prices. (Marginal cost to use the economics term).  As more energy is needed to retrieve the same quantity of resources, the potential for economic growth goes down.

If population were a driver of economies, why aren’t India, China and Africa the richest parts of the world?

Immigration is a difficult issue because it often involves humanitarian and racist issues.  There may be humanitarian reasons for encouraging immigration, but this weblog focuses on economics and it is not clear we should see immigration as a solution to current economic problems.  It could be that immigration will put additional stress on economic resources and make problems worse.

Pensions or a cruise?

A columnist for The Economist says people should ensure their pensions are adequate before they think of a world cruise.  I think the world cruise should come as soon as possible and worry about the gas bill later.

It could be that we have conflicting conflicts of interest in these recommendations.  One of my stepsons and his wife are entertainers on a cruise ship and the columnist probably has friends in the investment industry and gets some of his income from advertising and subscriptions from the industry.  You can read the column here.

Retirement is important for a lot of people.  A few years ago it was fashionable to plan for retirement at the age of 40 or 50.  Now that columnist is suggesting people may have to work beyond normal retirement age in order to have the lifestyle they desire.

Retirement planning is easy when the economy is growing and everyone believes that growth will continue.  But when growth ends all those plans and savings are likely to fall apart.  There are three things that can happen to savings and retirement funds:  inflation can wipe out their value, firms can fail or governments can decide to give haircuts.  It is not clear that there will soon be a return to economic growth.  Given the current economic uncertainty, any one of these could happen at any time.

The columnist suggested that inflation-linked government bonds  “should be the building blocks  of a pension portfolio.”  This ignores that most governments are carrying more debt than they will ever be able to repay.  When the Ponzi scheme explodes a lot of people will find their dreams destroyed.

In the meantime, those in the investment industry are doing short-term well out of all those people worried about their retirement income.

So far the economic crisis has mostly hurt young people.  If or when it hits older people and they can no longer afford cruises the cruise industry will have a surplus of ships.  They may then have lots of work for an Italian cruise captain with some experience at decommissioning ships.  I encourage people to take a cruise before he gets called back to work.

Here’s a Irving Berlin/Fred Astaire song from 1936: “Let’s face the music and dance”  or cruise.

High pay packages and restricted competition

The Economist appears to be defending high pay packages for company bosses in this article about the current focus of criticism.  The argument is that $52 million is justified by performance but one has to ask if this performance is based on the skills of the chief executive and if so what skills.

The general rule is that firms make profits by getting governments to pass legislation which restricts competition.shokunin_businessman

I don’t know much about the health care industry (the firm is McKesson, a big American wholesaler of drugs and other health-care supplies) but this industry involves a lot of emotions in that many people will use a lot of purchasing power in the hope of living an extra two years – possibly in a nursing home.  It is also an industry that depends upon patents for its profits.

It is not clear to me that this firm is making huge profits because of the skills of its boss.  Maybe the smartest thing this guy did was to get into the health care industry.

I am also wondering about the ethics and morality of a firm (or industry) that uses patents to exploit people’s emotions to make excessive profits.  But what the heck, some of the points in this post probably apply to a lot of other industries.

A road trip

This guy has just returned from a road trip to the eastern side of Saskatchewan ( city of Yorkton) on the Canadian prairies.  Through the mountains the scenery is spectacular but in some ways the prairies are more interesting as there is more human activity and many degrees of flatness. (There are extensive vistas from some of the high spots.)

Once upon a time as a reporter in a British Columbia fruit-growing community I decided I did not want to be a farmer.  When I got to university and studied economics I reaffirmed this decision.   But I do believe agriculture is too important to leave to people who make their living at it.  As we drove there were many questions about what I saw but it is hard to get answer when traveling at 100 km per hour.

1-DSCF5710DSCF5728The most obvious change is in the size of farms.  There are many abandoned farms sites, each one probably representing a broken dream.  With this there has been a change in the style and size of the grain elevators.  The pictures are of the old and new styles.

Coming home we took a secondary road and found that the road less traveled is sometimes less well maintained.  Driving on broken pavement and lots of potholes can be stressful.  When budgets are tight  it’s the major roads that get the money.

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