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Thursday, March 7, 2013

"Productive waste"

OK, I know I already tweeted (twice) about this, but this whole concept is absolutely baffling, and infuriating.

I had never heard of this man before seeing this video, but apparently Bill Janeway is a partner in investment firm, Warburg Pincus.
(Watch it, it's only 2:25 long)



Janeway promotes this ridiculous concept of "productive waste".

He believes the government should be selecting winners and losers, rather than letting the market dictate what products will survive. He cites the Obama administration's throwing millions of dollars at failed companies Solyndra and A123 as examples of this.
Innovation, he says, takes years of "trail and error and error and error". Rather than letting private investors take all this risk, he believes the government should absorb the risk. This might sound alright, that is until you realize the government generates no money. It takes it from you and is risking taxpayer (your) money on these projects.

This could be a separate post, but the reason Solyndra and A123 failed was not because they didn't have enough money or the money and company were mismanaged, although that could contribute. Nor was it because of subsidized, cheaper solar panels from China, despite what the company and many in the government would like you to believe. They failed because the market did not want their products. Solyndra had thousands of parts in inventory, ready to build, but no one was placing orders.
Also another post, but China's subsidies of solar panels does not hurt the local economies.


The whole premise of accepting some loss for a greater gain reminds me of Nancy Pelosi's famous assertion that the devastating quake that hit Haiti in 2010 would be an economic boom for them.
House Speaker Nancy Pelosi said today the Haiti earthquake could give the poorest nation in the Western Hemisphere a chance to “leapfrog” its lack of development.

“From my own experience with earthquakes, being from San Francisco, I think that this can be an opportunity for a real boom economy in Haiti,” Pelosi said. “It can leapfrog all over its past challenges — economically, politically, and demographically in terms of the rich and poor and the rest there and have a new — just a new fresh start. And with all of the concern and compassion and enthusiasm to help the people of Haiti, nobody is better suited than President Clinton to channel that energy.” (SFGate)
Not to get too deep into economic theory, and I believe I may have cited this before, but this is exactly what Frederic Bastiat is talking about in his famous writings on "That which is seen, and that which is not seen".

Bastiat gives the example of a shopkeeper's broken glass window.
The window costs $3 to fix. Which may seem great for the window-maker. This result is what is seen.
What is unseen is the fact that instead of paying $3 to repair his window, the shopkeeper could have bought himself a new pair of shoes, further expanded his shop, or (heaven forbid) saved his money for a later purchase/investment.

By Pelosi's reasoning, we should go around trashing Detroit. That will enable them to get a fresh start and all their money will go to infrastructure projects which, in turn, will bolster the construction industry. It'll be a booming city again in no time!


But, I digress from the video...


Even more baffling is his response when asked for an example of "productive waste".
Appearing to be incredibly pleased with himself for preparing this answer, he gives the example of the Transcontinental Railroad.
In his answer, he cites the fact that, through cronyism, the government gave 9% of its land to "corrupt" railroad tycoons. But because a economic boom followed (correlation does not imply causation), the corruption is acceptable.

Another bonus, we fulfilled our "manifest destiny". In case you forgot, "manifest destiny" was the belief that it was god's will that the United States should expand its territories from coast to coast, bringing law and order to the unruly wilderness.
In addition to the spread of slavery in the annexed southern territories, Native Americans were evicted from their lands and this would ultimately lead to the establishment of "reservations".


Finally, there is his proposed amount of government spending that he believes would get the "foundation" set for the next economic boom...

$300-400 billion dollars! (Or about 2% of GDP)

To give perspective, the American Recovery and Reinvestment Act of 2009 was about $787 billion, and some economists believe we needed even more.
So I'm not quite sure what Janeway is getting at here. Those in favor of the "stimulus", believed we should have spent a lot more; while those opposing it believe we should not have spent at all. Meanwhile, Janeway thinks about half as much should be good enough to propel us to recovery.


Obviously, I'm no Keynesian, but this man's reasoning is beyond even that of Paul Krugman.

The government has proven, time and time again, that it is terrible at picking winners and losers (it usually picks losers) and should not be trusted to do so.

Even if it had a better success rate, why does Peter's widget factory get government money, while Paul's widget factory (making similar products) get none?

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