November 22, 2009

Kelo, GM, and the Stimulus: Three Big Government-Induced Failures

Filed under: Business Moves,Economy,Scams,Taxes & Government — Tom @ 10:47 am

Government-managed economic projects rarely deliver.

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Note: This item went up at Pajamas Media and was teased here at BizzyBlog on Friday.

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Recent weeks have not been good to those who bitterly cling to the notion that governments can manage economic initiatives. Three of them — one in real estate, a larger one in manufacturing, and a colossal enterprise supposedly intended to revive a downward-spiraling economy — have all either failed miserably or foundered badly.

KeloOn November 9, pharmaceutical giant Pfizer announced that it would abandon its eight year-old research and development facility in New London, Connecticut. That decision effectively ended the chances of any additional development taking place in the city’s Fort Trumbull area, the subject of June 2005′s infamous Kelo v. New London Supreme Court decision.

Citing what Justice John Paul Stevens called a “carefully formulated … development plan,” the Court’s decision allowed the city to condemn and bulldoze dozens of houses. Today, the area, except for the politically connected Italian Dramatic Club, is a vacant wasteland.

Hopes for anything substantive were already on life support. But Pfizer, whose 2011 departure coincides with the end of 10 years of tax abatement originally granted by the city, applied the fatal blow.

GovtMotorsThen on Monday, government majority-owned General Motors issued its first post-bankruptcy clump of financial information.

Calling GM’s release a “financial report” would be an insult to financial, private industry, and regulatory officials who have worked for decades to create uniform and credible accounting and reporting standards. Instead of following generally accepted accounting principles, GM pulled terms like “managerial income” and “structural costs” out of thin air, and backhandedly warned us in a separate Word document that the unaudited numbers really don’t mean anything:

Management believes these adjusted financial measures provide meaningful supplemental information regarding GM’s operating results because they exclude amounts that GM management does not consider part of operating results when assessing and measuring the operational and financial performance of the organization.

My translation: “We took out the stuff we didn’t like.”

Even after doing so, and even after washing away over $80 billion in past problems through bailouts and bankruptcy, assisted by government favoritism and intimidation, the company reported a loss — er, “managerial net loss” — of $1.2 billion.

UncleSamDumpingMoneyFinally, in more recent days the $800 billion-plus economic stimulus package passed by Congress in February has crossed a credibility-destroying threshold that even vocal opponents probably never thought would be breached.

For several weeks, evidence of the effort’s ineffectiveness has mounted while the overall unemployment rate has accelerated. In city after city, state after state, reports of skimpy numbers of jobs “created or saved” despite billions in spending have multiplied faster than well-fed cancer cells in a Petri dish.

But at least those projects were carried out in real places. Now we have learned from watchdog.org that, “According to data retrieved from recovery.gov, nearly $6.4 billion was used to ‘create or save’ just under 30,000 jobs in (440) phantom congressional districts–almost $225,000 per job.” Further, the chairman of the government’s Recovery Accountability and Transparency Board has told lawmakers that he cannot “certify that the number of jobs reported as created/saved on Recovery.gov is accurate and auditable.” What is transparent is that these people don’t know what the heck they’re doing, and that the Mother of All Boondoggles looms on the horizon.

These examples all clearly demonstrate that government should be the last place people look to for solutions to economic problems.

Instead of rolling the dice on a single company’s fortunes, concocting a grand scheme that was problematic even in a healthy economy, and snookering the Supremes into believing they had something that would work, New London and Connecticut officials should have been working on making their city and state more hospitable to private development and business in general.

Alas, Nutmeg State Governor Jodi Rell’s tax-raising second term has become a case study in how supposedly fiscally conservative Republicans allow themselves to get captured by entrenched bureaucracies. The Tax Foundation rates the state’s business climate as 38th best in the nation. Meanwhile, even acknowledging that it includes education and is slightly lower than the previous year, New London’s 2009-2010 budget of $79 million seems excessive. 42% of its money comes from state and federal aid.

Instead of sending tens of billions down a rat hole and ending up with a company that still loses money, GM should have been allowed to fail on its own. An intervention-free bankruptcy would have required all parties involved to take the haircuts necessary to emerge with a better chance of long-term success. Instead, here’s a dirty little secret: According to one of the United Auto Workers’ own communications to its members, whatever “concessions” if any that were made during the months before the company emerged from bankruptcy involved “no loss in your base hourly pay, no reduction in your health care, and no reduction in pensions.”

And finally, instead of embarking on a campaign of wasteful spending using Keynesian tactics that failed to work during the 1930s under Roosevelt and during the 1990s in Japan, Congress — in early 2008 when the first signs of a stumble appeared — should have permanently cut federal income and capital gains tax rates to below where they have been since 2003. This step would have given businesses, investors, and entrepreneurs more capital with which to make wiser resource allocation decisions. At the very least they would have invested in things and in places that really exist. Such a move would at a minimum have reduced the impact on the overall economy of the government-driven abject regulatory failure known as the housing downturn, and could conceivably have prevented the recession completely.

If private developers, private sector companies, or investors make bad decisions or fail to manage their projects well, the damage is usually limited to their own immediate circle. But we all pay, and usually much more dearly, when governments try to take their place.

The micro and macro lessons are clear. So why do statists keep doing things that don’t work?

It could be that they are so blinded by their ideology that they are intellectually incapable of learning from their mistakes. But it’s much more probable that most of them have learned and simply don’t care. They would prefer having more power and control over a situation involving mediocrity and malaise to having less control over one of growth and prosperity. What they are trying to do to the best health care system in the world, the cost and permanent damage of which would over the long-term dwarf the three examples I have cited here, demonstrates why the second alternative is more likely the correct one.

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1 Comment

  1. If someone were intent on destroying America as we know it, what exactly would they do differently than what Obama, Pelosi, Reid, and company are doing right now?

    Comment by Best — November 23, 2009 @ 5:23 am

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