International Bailout Competition Begins

The US has provided its American automobile industry access to money that it otherwise would not be able to get.  Car companies in other countries around the world say that this bailout is a subsidy that gives American manufacturers an unfair advantage over their foreign competitors.  Consequently, foreign car companies are asking their governments for bailouts too.  Due to the nature of international competition, we can safely expect other industries around the world to behave the same way.

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Are Industry Bailouts Legal?

Aren’t the bailouts of industries by the US government a form of subsidies?  I thought those were supposed to be phased out according to international trade agreements.  Doesn’t the World Trade Organization, the North American Free Trade Agreement, and similar trade agreements with the United States threaten sanctions against member countries that introduce new subsidies to protect domestic industries?

The bailouts of the American auto industry and the American financial industry obviously help American businesses compete agianst foriegn businesses.  What will prevent those treaty members from suing for damages or sanctions as a result of the market warping subsidies given by the US government to American businesses?

Free Markets Need Rules?

It may seem to be a contradiction to describe something as free when it is bound by rules.  That is the case with free markets.  They exist only when specific rules are obeyed.  The banning of anti-competitive behavior exemplifies those rules.  When those rules are broken a free market becomes something else.

When left to their own devices, free markets self destruct. To understand why, focus your attention on how resources are redistributed in free markets.  Then a way to save free markets from themselves can be conceived.

Successful free market participants are rewarded with more resources than their competitors for their efforts.  (A buyer gets something that another buyer can not afford to buy.  And a seller makes a sale instead of another seller.)  The most successful competitors get extra resources.  Ideally these extra resources are used to increase supplies of whatever they offer.  This is supposed to happen until the price of these supplies become too low for less efficient competitors to stay in business.  This can conceivably lead to a monopoly.

That situation would be ideal if it does not afford the winner an opportunity to change the market’s rules and artificially inflate their advantage.  A monopoly’s, (or cartel’s), influence over the market’s rules is proportional to their share of the market.  The rules inevitably are changed to favor established sellers and become anti-competitive.  That violates free market rules.  A manipulated market is not free.

Free markets are worth preserving.  They bring as many sellers together with as many consumers as practicably possible.  Free markets most dependably give consumers what they demand until rules that protect established sellers happens.  Then the free market is subverted and becomes something else.  Rules defining free markets also need to help preserve them.

It is too bad that what makes free markets so desirable also gives successful participants an incentive to become domineering.  An equally impartial dis-incentive is needed for balance.  It is obvious that this dis-incentive needs to punish participants that begin to dominate a free market.

A free market rule that imposes a progressive tax on the value of market share can provide a plain and impartial method to preserve the market’s competition and innovation.  It can also provide an equitable source of government funding.  The tax could be scaled so that it diminishes the incentive of established market participants to gain market share until they have around 33% of market share.  Then that incentive can be completely canceled out.

The target of 33% can be optimized to maximize tax revenue.  Potential revenue for this kind of tax is only limited by the health and growth of the market.  That gives regulators a strong incentive to do what is really best for the market.

Russian Styled Centralization Replacing ‘Big Three’ Cartel’s Control Over American Auto Industry

This article by David Herszenhorn and Jackie Calmes titled “‘Car
Czar’ prescribed for automakers” describes a fundamentally flawed proposal to rescue collapsing industries. It would have an
elite group of industry-wide managers led by an appropriately named ‘Czar’ guide the failing American auto industry.

The name Czar reminds us of Russia and its instinct to centralize control
over industries and the economy in general.  That kind of economic
management is what caused the collapse of the former Soviet Union.
Competition is suppressed along with innovation for various self-serving
reasons in economies that are managed this way.

Lack of competition and innovation is also why the American auto industry is failing in the face of foreign competition. The ‘Big Three’ are essentially a cartel that has ruined the American auto industry’s free market. This scheme to appoint a  body of central managers over the industry is only going to enshrine the industry’s fundamental dysfunction.

There is a better way to use the money that would be used
to fund the auto industry’s bailout; and the money used to fund the new bureaucracy meant to manage the industry. Give it to average taxpayers in the form of a voucher. These vouchers
would subsidize the purchase of energy efficient, environmentally
friendly, American made cars. This would let consumers decide what
American auto companies, either old ones or new start-ups, deserve
help from the government.

We can avoid the pitfalls of both Russian styled socialism and US styled free capitalism.  The corrupting and smothering affects of centralized market controls by governments and big businesses are kept in check.  We must restore the rightful status of consumers as the leaders of our economy, for freedom’s sake.

Inflation Is Coming!

Banks can loan out 90% of all of their deposits.  Investments banks and many other financial institutions can invest 100% of their deposits.  What has happened recently is that the banks and other financial institutions have been investing in each other and artificially inflating the value of their capital.

Just imaging the effect of a well regulated bank taking 90% of its deposits and redepositing that money in a neighboring bank.  And that bank, in turn, does the same thing back to the first bank.  The apparent capital of a commercial bank, then, can be extremely inflated.  This effect has been even more extreme in other financial institutions.  More ‘fake’ capital, (money), has also been generated in a similar way by financial markets and by the new fangled products that traded there.  The result is a lot of ‘paper’ wealth has been generated and used as collateral for investing in ‘real’ wealth; such as real estate.

Now, that fake money has evaporated leaving everyone with more debt than real money.  The result is deflation; the value of money increases compared to the value of other property.  In other words, a dollar can buy more tomorrow than it can buy today.  That is why the trillions of dollars injected into the economy by the government are not yet causing inflation.  Those cash injections are only filling in the void left by the evaporation of the fake money.

But governments are clumsy managers.  Chances are they will inject cash until the economy has recovered enough to inspire businesses to spend again.  And for reasons stated in other parts of this blog, that will is going to take an exteded period of time.  By then businesses would have hoarded so much cash that they will go on a spending spree.  This, combined with all of the other cash injected by the government, will inevitably inject too much cash into the economy.

We will experience a lot of inflation when that time comes.

Congress Abandons Consumers

The reason why the economy is collapsing is because too many average consumers have lost their purchasing power. From the beginning of the crisis this has been obvious. So why are policymakers concentrating on implementing a trickle-down approach to rescuing the economy?

They have put their faith in the directors of big businesses to save our economy. Almost all of the cash meant to rescue the economy, (last count = more than 2.7 trillion), has been given to them. This is despite the widespread belief that free markets most efficiently direct investments to where they would be most useful. Our leaders need to remember why free markets work well.

Free markets democratize the economy. They give consumers the power to direct the economy. Consumers do this with their purchasing power. They give money to sellers and investors who offer the best deals for the things consumers want. In a free market anyone can hope to become a self-made business magnate. And the customers get to choose them. Free market economies serve the will of the people.

Our free market economy is quickly disappearing. The people have lost their purchasing power and Congress has abandoned them. Money for saving the economy has been given to the leaders of big businesses. They are not investing that money in people who would compete against them. The directors of big businesses are using their purchasing power to help themselves.  Regular consumers are left to fend for themselves.

Congress’s mistake must be corrected soon. The bailout money is being hoarded by big businesses that are laying off employees. More consumers are losing their purchasing power. If centralized control over the economy remains for the long term, then innovation would probably be stifled by timid bureaucrats and big business leaders eager to protect their profit margins. The situation is getting worse.

Policymakers and Congress can easily correct this situation. Simply direct the bailout money to average consumers. Let them choose which businesses deserve a bailout. Chances are almost everyone will get what they want.

Obama Improves Hillary Clinton’s Prospects

If you are one of the women bitter about Barack Obama being the next President of the USA, then here is some comforting news for you.  Hillary may be President in eight years.

If America can elect Barack Obama to be the President, then it certainly can elect a woman to be one too.  Discrimination against women in American society is not more severe than it is against African Americans.  Women are the majority of the electorate.  Male African Americans don’t have that advantage.  But an African American male has competed directly with a white female and has won the race for President.  Discrimination against women cannot be why that happened.

But American culture can be blamed for having an important role in Hillary Clinton’s defeat this year.  Traditionally in America women have enjoyed being considered the kinder gender.  Even today women are expected to be more kind and nurturing than men.  But it is difficult to imagine nice people surviving in the mean and dirty world of traditional American politics.  Voters have been skeptical of candidates that may not be mean enough.

There are at least two ways to help women and nice people in general overcome the electorate’s doubts about kind people being effective in politics.  Either kind people must give up being nice and become as mean and dirty as the men who have traditionally been political leaders in America.  Or people’s perception of American politics as a domain only for the mean must change.

Americans seem to be losing their tolerance for mean politicians.  That is why Barack Obama’s campaign theme about ‘Change’ and ‘Hope’ has been so important for his victory and Hillary Clinton’s defeat.  He concentrated on giving voters the impression that he is a peaceful, clever, and thoughtful candidate.  That is a stark contrast with the macho rhetoric of Republicans.  Barack Obama portrays himself as a ‘nice’ guy who is capable of making government nice too.

Hillary Clinton’s primary campaign has concentrated on proving to voters that she can be brutal enough to fight fire with fire.  She portrays herself as ‘experienced’ with politics as usual.  She would have given the Republicans a strong dose of their own medicine.  Americans are not hoping for that.

Fortunately for Hillary Clinton, Barack Obama has offered her an opportunity to redeem herself by becoming Secretary of State.  She can remain in the national spotlight while her persona is transformed for the better.  Rather than merely being just another ambitious mean person, Hillary Clinton can show that she is someone who can really help make the world a better place for Americans.

Barack Obama has given many people the hope that he can transform American politics from being a mean process into one that welcomes kind people.  If that happens, then women and other people associated with kindness may have a better opportunity to succeed in politics than they could have hoped for otherwise.  And Barack Obama may helped Hillary Clinton become a better champion.

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