A new McKinsey’s report, featured in the Financial Times, shows that over the past 25 years, the dominance of large companies has increased, as has the share of capital returns in the economy, while wage levels have risen far less than productivity. The FT’s solution to this is more state meddling, with redistributive policies to move income from large corporations to poor individuals.
I would suggest that the solution is the opposite: give up the state meddling of the last 25 years, most particularly the Gosplan approach to setting the prices of key inputs.
McKinsey Global Institute’s report notes that, if you divide the universe of large companies into eight major sectors, the finance and “expert” sectors have advanced since 1996, at the expense of manufacturing and “building” (construction and infrastructure). Capital’s share of overall output has advanced while the wage share has declined, with wages increasing only 11% in real terms compared with a 25% gain in productivity. In other words, the highly credentialed have gained at the expense of the rest of us and capital has gained at the expense of labor. Furthermore, large corporations have increased their dominance of the economy.
The FT then takes a typically dirigiste approach to rectifying these imbalances, suggesting that taxes should be increased so that the capital surplus of large corporations can be redistributed to the less well off. To a socialist (which the FT effectively now is) all distortions of the market caused by socialism can only be cured by more socialism. This is an intellectual dead-end; more important, it is an economic one.
Market distortions, producing unpleasant effects such as those listed in the McKinsey paper, are almost always caused by attempts to manipulate the market, either by governments or by powerful institutions. Before Keynes, and even 30 years ago, it was generally accepted that such attempts are counterproductive. However, economics education has now gone so far backwards that this simple truth is no longer accepted by most policymakers, so that manipulating the market along the lines attempted by the Soviet Union’s Gosplan, is regarded as an intellectually and economically acceptable way to achieve politicians’ goals.
This kind of thinking produced a Soviet Union with far lower living standards than was justified by its munificent natural resources and the vast intellectual capabilities of its best people. Notably however, the system’s deficiencies were never admitted at the time – hence my 1989 ‘Economist’ diary claimed that East Germany was richer than Great Britain, an immediately laughable claim to anyone who visited the place around that time, as I did.
The most important element of Gosplan thinking among current policymakers is in interest rates and monetary policy generally. Ever since the Fed’s policy reversal of February 1995 and more particularly since Ben Bernanke’s “helicopter money” speech of November 2002, the Fed and other central banks have operated on the theory that interest rates are a variable under their control, rather than being properly set by the market. In Japan, Bernanke’s thinking percolated even earlier, as the Bank of Japan, troubled by Japan’s long post-1990 recession (which was in reality caused by an entirely natural collapse of over-inflated asset prices, the deflation of a gigantic 1980s bubble) has been working on his “helicopter money” theory since late 1998.
With the Fed and other central banks setting interest rates according to their own whims rather than according to the demands of the market, a central economic variable, the price of money, is no longer set by interaction between willing buyers and willing sellers. The effect of this is exactly as if Gosplan set an artificially high (or low) price for steel; every other factor in the economy that uses that input would either be over-produced or under-produced.
In the Soviet Union, Gosplan’s eccentricities resulted in an oversupply of capital goods and an undersupply of consumer goods. In the modern West we have an oversupply of those items that can be used for speculative investment, fueled by ultra-low interest rates. The crypto-currency bubble is almost entirely a creation of cheap money – it did not exist before 2009 and now has a value of trillions of dollars. Similarly, big-city real estate prices have been pushed up to absurd levels by “funny money.” Does anybody really think that the “pencil towers” of midtown Manhattan, stretching over 1,000 feet into the sky with one apartment per floor, would exist were it not for the speculative profits to be gained by the ultra-rich in owning them? No sane person, aware of the dangers of terrorism and mere weather, would want to live near the top of such a tower, but funny money produces insanity in this as in other areas!
Just as Gosplan left the Soviet Union with an acute shortage of consumer goods, so the modern Fed and its counterparts have left the West with an acute shortage of long-term stable medium sized businesses, which produce most of the world’s productivity gains and provide most of the high-quality employment for the middle classes. Under the 18th Century Whig Supremacy, nobody bothered to attempt the grinding long-term effort of forwarding the Industrial Revolution when there were India and the slave colonies to loot. Similarly, today few people enter into the difficult effort of forming an industrial company that pushes forward a technological application, makes things and employs people in well-paid jobs, when there is easy money to be made in private-equity-funded software or finance or urban real estate speculation.
Money is not the only commodity that is regulated on the Gosplan principle; energy production and use is increasingly falling under the same malign management. The German government decided around 2005 to panic about “global warming” but instead of simply installing a carbon tax (and reducing other taxes by an equivalent amount) it devoted huge subsidies to the construction of solar and wind energy farms in the cloudy stagnant air of Germany. Another panic about nuclear power resulted in the premature closure of Germany’s nuclear power stations – banning something altogether, of course, is simply an extreme case of the Gosplan approach, where the price of the item is set at infinity. Consequently, German energy prices have trebled over the last 15 years, and the country has the most expensive energy in the world. The result has been catastrophe for the German steel industry and for a host of German manufacturing industries that needed moderately priced energy to remain competitive.
Germany benefits from a positive subsidization in the very complex mechanisms of the gimcrack euro (whose interest rates are set far below market levels and exchange rate is set to favor German exporters). However, it has another huge loss coming to it in the 1,025 billion euros (at April 30, 2021) of Target 2 balances owed to the Bundesbank by the euro settlement system – this was deliberately organized without a proper mechanism to keep such balances close to zero, thus forcing German taxpayers to subsidize the deadbeats of southern Europe. The Comecon payments system set up by the Soviet Union among its satellite nations suffered from similar problems, although not as large.
Overall, the world through the Paris accords has taken a Gosplan approach to the problem of global warming. Instead of setting a carbon tax and then letting the market work out the best balance between carbon-emitting industries and carbon capture technologies, the Paris system mandates vast target schemes of “zero emissions by 2035” or some such, regardless of the expense involved or the feasibility of those targets’ attainment.
To some extent, it is clear that part of the attraction of “climate change” for many on the left is the ability it gives them to micro-manage the world economy, banning the Keystone Pipeline in the United States, for example, while allowing the Russians’ Nordstream 2 pipeline with its adverse strategic implications for the West. Likewise, the recent sale of drilling leases in the Arctic, followed by the cancellation of those leases less than six months later, has added large costs to the economy without any measurable benefit, other than to the politicians concerned. A less politicized system would have made it impossible to cancel the leases, thus in turn greatly increasing the price that oil companies were prepared to pay for them.
Through the power of environmentalists, the West has converted much of the West’s economy into a Gosplan system, in which targets, goals and permits are set arbitrarily by politicians, with the system changing every time the electoral winds change. Needless to say, this is no way to run an economy; it is as inefficient as the old Soviet system; indeed more so, because at least in the Soviet system the Gosplan planners were trying, however ineptly, to optimize the economy, without the distraction of frequent elections.
The path to good economic management is quite clear: it is to let the free market operate as far as possible, and not impose politically determined preferences on the pricing mechanism. Over the 194 years since Lord Liverpool left office in 1827, we have been getting steadily further from this simple ideal.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)