The real-world effects of gummint's sclerotic involvement in a society's economic life

Perusing the morning's array of news and opinion pieces, I was struck by the parallels between Andrew Browne's WSJ comparison of the regions of China that are in deep recession and those that are humming along, bringing general prosperity and vitality to their inhabitants, and Kevin Williamson's analysis of why Detroit, Michigan died.

In China, because its socialism is more monolithically and ruthlessly applied than is the case in post-America, you have a tier in the economy of enterprises that are actually state-owned. And that's the problem:

China’s economic slow lane is choked with state-owned industrial firms in sectors linked to real estate—steel, cement, coal and construction equipment—all suffering from massive overcapacity. Many get by on bank loans, endlessly rolled over, and orders for boondoggle civil-works projects. They are zombies in a phantom economy. Lawmakers gathered at the Great Hall of the People are likely to review government plans to reduce industrial capacity somewhat and to gradually lay off several million workers while offering them help with relocation and retraining.

Zipping along in the economic fast lane are private companies producing goods and services for a burgeoning consumer market that has taken over from manufacturing as the engine of China’s growth. These corporate leaders are mainly clustered in megacities along China’s eastern seaboard—Shenzhen, Guangzhou, Shanghai, Beijing—linked to global networks of knowledge, finance and talent.

Lopsided growth in a nominally socialist country is an especially thorny problem. Deng Xiaoping resolved the issue by turning Marxism on its head: “Let some people get rich first,” he famously declared. But today’s Internet-empowered industrial workers won’t be treated as second-class citizens. Some hanker for a return to socialism. Others find solace in religions and cults that challenge Communist Party control. Widespread anger at wealth disparities could further sap the resolve of China’s leaders to press ahead with economic reforms—and might even encourage them to launch  military adventures to deflect popular frustrations.

The same basic pattern played itself out in the Motor City:

Detroit is a big city, or at least the ruins of a big city, but it is economically in much the same situation as the poorest parts of Appalachia: Even if you were inclined to open a factory there and create some jobs in the process, you’d have to bring in workers to fill them. The people in Vance, Ala., like the people in Stuttgart, know that putting Mercedes-Benz automobiles together requires a great deal of high-skill work. The people building Toyotas in Texas know the same thing. Nobody is moving to Detroit, because there are no jobs to be had; good jobs aren’t coming to Detroit, because there aren’t enough good workers to be had. The best you’re going to see in Detroit is Shinola workers shoving Swiss-watch movements into Chinese cases and stamping them “Made in Detroit.” Sentimentality is a form of capital, too, when it can be used for marketing purposes. But we’re going to have to do better than that. 

Detroit is a city in which only one in five black men graduates from high school on time — in a city that is 83 percent African American. You think Google is going to move its headquarters there, or invest in a major facility? Tesla? Apple? Does that sound like a place you would invest in?

How did Motown fall so low?

 . . . civic and corporate myopia left Detroit dependent upon a handful of firms whose production undergirded the entire economic ecosystem of Detroit. A combination of factors deformed the economic foundations of Detroit, from governmental protectionism (which made managements thick and lazy) to union rapacity (which diverted potential investment capital into inflated pay and benefits, creating a lot of multimillionaire union bosses) to our national unwillingness to deal with the fact that Germany and Japan — smoking ruins at the end of World War II — would eventually rejoin the modern industrial economy. Rather than finding its way to its best uses through Schumpeterian creative destruction, capital was locked up in poorly performing enterprises such as Chrysler (executive hipster Lee Iacocca was into bailouts before bailouts were cool) and in malinvestments such as unsustainable pension funds. Because most of us lack sufficient imagination, we do not understand what the price of that was. The price isn’t just bailouts and layoffs and factory closings, as painful and convulsive as those have been in Detroit and throughout the industrial communities that inflicted similar problems upon themselves. No, the real cost — the literally incalculable cost — is the lost value that would have been created had all that capital been liberated and put to its best use. We have forgone generations’ worth of compounded returns on investments that we should have made but did not. Another way of putting that: It is far easier to solve the problems of 2016 starting in 1950 than starting in 2016.

Okay, boys and girls, what is the basic takeaway from examining these two scenarios?


It's real obvious, and has been pointed out by those who understand the relationship between economic freedom and human advancement since at least the time of Adam Smith: When the state controls economic activity, no one has any incentive  to think of better ways to do things, or better products to offer the public.

What I find attractive in someone vying for high public office is an understanding that free-market economics is at its core a spiritual matter. Anybody can spew platitudes about "jobs for the middle class" and "surmounting wage stagnation," but that message's ability to inspire pales in comparison to reminding folks that human beings were designed to be marvelous, powerful, inventive creatures and that they will do great things - if they are free to do so.