A Fateful Turn The New American Command-and-Control Economy

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America
is about to make another fateful turn toward a command-and-control
economy from which it will become much more difficult to return.
Political commentators and pundits are putting pressure on Congress
by forecasting the demise of the Republican Party in Ohio, Michigan
and much of the industrial Midwestern part of the United States
if GOP members of Congress do not vote with Democrats to bail out
the US automakers, General Motors, Ford and Chrysler, with $34 billion
of taxpayers' money. Detroit's lobbyists are working hard to get
the bail out money for their clients. Tens of thousands of jobs,
if not millions, will be lost we are told unless there is a bail
out. This is the standard argument put forth by government lobbyists
and their media lackeys in their effort to scare the people and
politicians into believing that thousands of jobs (translated into
political terms — votes) will be lost if such inefficient industries
are not protected by the government from the effects of competition.
The culprit is free trade says Pat Buchanan, the conservative columnist
and former Nixon speech writer; other pundits blame it on the greedy
oil companies. The effects of years of government intervention in
the auto industry and the economy are ignored. Ignored also is the
fact that automakers from overseas (for example Toyota, BMW, Kia)
with plants in the United States have not been seeking a bail out.

The arguments
for bailouts and protectionist legislation have always been the
same — to protect from the rigors of the marketplace industries
that are failing or just starting up. In other words the government
should intervene to change consumer preferences being reflected
in the marketplace. Protect the buggy whip manufacturers from the
competition of automobiles, protect the railroads from airlines,
protect industries from foreign competition, protect consumers from
alleged hazards of mobile phones, etc. — the list goes on and on
and on. As silly as it now seems there was once created a fear of
the electric light bulb as it began to replace gas lighting around
the turn of the century. Large placards were often displayed in
hotel rooms warning of the dangers from these new electric light
bulbs. The underlying premise of all this protectionism is that
the consumer is too stupid to know what he or she wants and too
stupid to make informed decisions on the basis of each consumer's
needs and value judgments.

These are the
same consumers who on Election Day are said by the politicians to
be so intelligent at having voted for this candidate or that candidate.
But the day after the election these previously brilliant consumers
are found to be so wanting in intelligence as to have voted in the
marketplace for a product or service other than one said by the
politicians to be vital for the economy or national interest. Thus
the government is required to intervene in the marketplace to alter
the preferences of these consumers who are now treated as if they
are wards of the state. This will be the future of the marketplace
in the United States as the government takes over more and more
industries (we are talking entire industries, not merely one isolated
company within an industry) with its bailouts (i.e. nationalizations)
and the US becomes a command-and-control economy (also called socialist,
fascist or communist economy). The government has already taken
over the financial industry and soon will takeover the US-based
automobile industry. The total costs of the bailouts to date are
now estimated to be $7.7 trillion. What industry will likely be
next and what will be the total cost of the bailouts? The governor
of California is foreshadowing California's financial demise and
the need for $26 billion of federal funding of infrastructure projects
in the state. How will this all end?

The
structure of this new expanded American command-and-control economy
apparently is to be similar to the fascist economy of Italy adopted
by the dictator Benito Mussolini, empire builder and ally of Adolph
Hitler and the fascist Nazi (National Socialist) Germany. Under
fascism the companies maintain their corporate identities and names
while the government provides the capital and owns (and controls)
the underlying assets of the company. Thus, the appearance of a
private market economy exists while in fact the government owns
the means of production and distribution. Like fascist Italy this
American command-and-control economy will be directed at the point
of a gun by politicians and bureaucrats (if you do not believe me
resist to the nth degree paying your taxes or complying with
a government regulation and see what happens when the police show
up at your home to take you away). Political pull and power will
become the new "capital" as certain individuals, interest
groups, unions and companies jockey for position to promote themselves
and thwart their competitors in this government-directed society
and economy. A vivid depiction of life in such a world is set out
in Ayn Rand's timeless classic Atlas
Shrugged
.
For example, long a thorn in the side of the US banking
cartel, headed by the Federal Reserve, Wall Street investment banking
has been wiped out by the Fed's and Treasury's takeover of the industry
through a combination of bail outs, pre-packaged bankruptcies or
forced mergers and conversions of investment banks into the banking
cartel.

The
US-based auto industry is soon to be taken over by the government
in the United States (GM and Ford are also both seeking bail outs
of their local manufacturing entities in Sweden and Australia).
The opportunity of the majority party in Congress to solidify its
power base in Michigan, Ohio and the industrial Midwest is too tempting
not to bail out the industry. The US-based auto industry has been
losing market share to overseas automakers since the 1960s as the
foreign imports became widely accepted and demanded by American
consumers. At first they were derided as a novelty — funny little
cars. As David
Halberstram
described it the US automakers
willingly opened their doors to the Japanese automakers' research
teams so confident were they that the Japanese and their little
cars would never be a competitive threat. Detroit's denial continued
as the Japanese continued to increase their share of the American
car market. The funny little cars then became recognized as well-built
fuel-efficient cars which filled a niche in the American car market.

Companies such
as Toyota were predominantly truck manufacturers during World War
II and shifted to automobile manufacturing following the war. Given
the conditions of Japanese roads the trucks were required to be
well-built to withstand the rigors of travel and transport within
the country as well as for the military. This manufacturing expertise
followed in the construction of their automobiles and became recognized
by the American consumer along with their styling and fuel efficiency.
The American-based car manufacturers struggled to build a competitive
small car. The oil shocks of the 1970s caused American consumers
to demand more efficient cars which the Japanese were now exporting
to America in ever-increasing numbers. The US-based automobile industry
experienced severe stress — American Motors (with its Jeep line)
merged with France's Renault in the late 1970s and was later acquired
by Chrysler in 1987. Chrysler, through its new head and master salesman
Lee Iacocca, had to seek a federal bailout in September of 1979
which was approved by the government and signed into law by then
President Jimmy Carter on January 7, 1980.

The
quality of cars being produced by Chrysler were such that it should
have gone out of business, which of course would have been competitively
better for GM and Ford (and perhaps as well for the American Motors-Renault
combination) and increased their financial strength. Instead the
politicians decided that one weak automobile manufacturer and two
or three somewhat weaker auto manufacturers were better for the
economy and the United States (in reality better for certain politicians'
reelections). The government's action also sent the signal to both
GM and Ford (and presumably American Motors-Renault as well) that
in the event of severe financial stress the US government would
bail them out. This inefficiency is the inevitable result of an
interventionist economy run by politicians and their appointed bureaucrats
rather than a consumer-directed laissez faire economy run by consumers
and their agents — private unfettered entrepreneurs and businesses.
By the 1980s the strong US dollar and demand for imports increased
the imports of overseas cars from Japan as well as from Korea and
Germany. The subsequent reaction was a wave of protectionism which
resulted in the larger exporters such as Toyota and BMW building
their own manufacturing facilities in the United States especially
in the southern part of the US where labor laws were much less burdensome
on employers. Toyota opened its first US plant in 1982 as part of
a joint venture with GM, setting up manufacturing in a GM plant
in California which previously had been closed.

No
amount of political fixing can hide the fact that the US-based auto
industry is not efficient and hence not competitive due to a multitude
of political interventions (i.e. the moral hazard from the Chrysler
bail out, labor laws, environmental laws, emissions standard, restrictions
on oil exploration and production, seat belt laws, etc.). Such government
intervention when coupled with management's failure to fully appreciate
competitive global market forces until it was too late and management's
knowledge that they were "too big to fail" has resulted
in the US-based industry being reduced to its present state of financial
collapse. The hourly rate (including health care costs) of US auto
workers is just shy of $75 versus less than $45 per hour for auto
workers at Toyota's US manufacturing plants. The foreign car companies
with manufacturing facilities in the US account for over 54% of
the US car market but employee only 113,000 workers compared to
GM, Ford and Chrysler who employ almost 240,000 workers. Thus it
is not surprising that such inefficiency coupled with the overall
stress in the global automotive marketplace as a result of high
oil prices (actually depreciating value of the US dollar due to
the Fed's long-continued inflationary policies) that the US-based
automotive industry is teetering on the verge of bankruptcy.

One
can only speculate on the outcome to GM and Ford had the government
not intervened and bailed out Chrysler in 1980. Having made a bad
decision regarding Chrysler the politicians will likely make another
bad decision by bailing out GM and Ford as well as Chrysler. Once
again the American taxpayer will be required at the point of a gun
to bail out another government-created mess. By continuing to prop
up inefficient industries through government bail outs and nationalizations
the US is soon to become a nation of much less efficient producers
in the world market. At some point in time some or all of these
companies or their assets will need to be liquidated, combined,
sold off or re-privatized. This process is likely to become highly
contentious as the various conflicting political interests intervene
to challenge sales of various assets, layoffs and plant closings.

This
is what the consumers in the United States have to look forward
as the command-and-control economy becomes more pervasive in the
United States — politicians and bureaucrats allocating capital to
borrowers and managing the operation of the nationalized banking
system, politicians and bureaucrats overseeing and managing the
operation of the nationalized automobile industry and other inefficient
businesses contrary to the demands of consumers. This is in addition
to the state-owned enterprises such as the Tennessee Valley Authority,
the US Postal Service, the public education system, and Amtrak among
the most obvious. We only have to look back in history at the former
Soviet Union to know how this ends up in the extreme — an entire
command-and-control economy consisting of inefficient businesses
whose products are in demand nowhere in the world except in some
other inefficient socialist or communist backwater.

If
President — elect Obama truly wants change then he should embrace
changing to a free market economy — withdraw from Iraq and Afghanistan,
reduce military and other expenditures, rescind the bail outs, eliminate
federal agencies and their bureaucrats, drastically reduce regulations,
drastically reduce taxes, eliminate the Federal Reserve and fractional
reserve banking, restore the gold standard and restore private free
banking. Rather than another advisory board should the new President
need advice on the economy he need only contact the Mises
Institute
with its large resource base of
books and articles on Austrian economics. I recommend he read Henry
Hazlitt's Economics
In One Lesson
to get a broad understanding
of Austrian economics and what is required to get American economy
out of this current substantial market correction.

If
Americans want to avoid this fateful turn toward a command-and-control
economy and the lower standard of living that will result from such
an economy then they must reject government intervention in the
economy and their lives. They must rid America of destructive government
regulations, rid America of government spending on bail outs, empire
building, overseas military adventures and other programs and rid
America of central bank control of the monetary system and restore
a private free banking system. Otherwise Americans have to look
forward to a highly inefficient command-and-control economy run
by the politicians and bureaucrats rather than private consumers
in a free and highly efficient market.

December
5, 2008

Jacob
Steelman [send
him mail
], an American ex-pat, is President of International
Ventures Group a global investment, finance and development company
located in Sydney, Australia.

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