Thursday, 29 August 2013

The myth of Colin’s deregulation disasters

“One of the methods used by statists to destroy capitalism
consists in establishing controls that tie a given industry hand
and foot, making it unable to solve its problems, then declaring
that freedom has failed and stronger controls are necessary…”
Ayn Rand on Today’s Crisis

Colin Espiner is the latest clown on point.  “In the wake of the Fonterra debacle,” says a Colin Espiner jumping Bernard Hickey’s shark into the pool of pro-regulation tadpoles, it’s “become obvious … light-handed regulation has … been an unmitigated disaster.”

Poor Colin. Turns out overnight that the “Fonterra debacle” on which he hangs his hat for the perils of light-handed regulation was “a false alarm,” the result not of private disaster but of government fuck-up. Don’t just take my word for it, listen to the voice of the Labour Party…

Revelations today that no botulism was found in Fonterra's whey protein is "a complete systems failure by the Ministry for Primary Industries," says Labour's Primary Industries spokesperson Damien O'Connor… Our failure to ensure the highest standards of testing, monitoring and auditing means the damage has been done to New Zealand’s international reputation.

“A complete systems failure by the Ministry for Primary Industries.” A failure by government inspectors. How does that fit with Colin's newly-discovered thesis that Ministries never fail?

I point this out not just to poke Colin’s thesis in the eye with a sharp stick, but to raise the important point that government departments fail too—and when they do the “complete systems failure” they cause can be catastrophic.  The department’s “complete systems failure” in this case means “damage has been done”—big damage—to New Zealand’s international reputation.”

To be fair to Colin, he cites more than just this debacle to make his argument against his new-found foe.

Colin argues that this country fell into a dangerous free-market hole in the 1980s and 1990s through the buzzwords "deregulation", followed by "light-handed regulation" and its kissing cousin "self-regulation.”

_Quote5Why employ big expensive government departments full of people who have to check everything [says Colin] when you can replace them with slimmed-down ministries that set policies and then tick off the completed forms sent back to them by employers?
    Get rid [says Colin] of the people who check planes, mines, workplace safety, food safety, telecommunications and other infrastructure, weights, measures, building standards, and everything else. And then make everyone do it themselves… The idea was simple, if crazy with the benefit of hindsight….
    It's taken a good 20 years for the sheer magnitude of the stupidity of those "reforms" … to become obvious [says Colin].

The result of these “reforms,” says Colin, was “the meltdown of our finance companies, the fleecing of thousands of investors of their retirement savings, a $6 billion leaky homes fiasco, the worst and least competitive telephone service in the western world, some of the highest electricity prices, the deaths of 29 miners at Pike River and most recently, the severe shock to our dairy industry.  Light-handed regulation has, in short, been an unmitigated disaster.”

For Colin, the “Fonterra debacle” was his last straw in this drive he identifies to getting rid of “big government departments” that check weights, measures, building standards, and everything else.

  • So what was that big government department doing testing Fonterra’s whey when according to Colin it doesn’t even exist? 
  • Where did all the dismemberment of Telecom come from, and what does the forced dismemberment say about who has more power in NZ today—politicians or businessmen and -women? (Q: How do you get a nice small business?  A: Take a large one, and make David Cunliffe the minister in charge.) And while that dismemberment was happening, telecoms companies weren’t inventing in big telecoms? No wonder. As I've said over and over again, "No one but an idiot or a cabinet minister would expect to see businessmen or women making a long-term investment in infrastructure when theft of such an investment is imminent, or the breakup of that investment is on the cards."
  • What are all those building inspectors doing crawling all over buildings checking to see if we’ve followed the rules set out in the welter of regulations that kept coming ever since that non-existent deregulation? What is that government department doing checking out all building materials to decide whether or not we’re allowed to use them? And check out the complete systems failure they caused when the materials they said were okay weren’t.
  • What did the government’s Reserve Bank (the biggest big-government department on The Terrace, so Colin surely can’t miss it) think would happen when they opened up their credit spigot and tipped out all that counterfeit capital? What was the government’s Reserve Bank doing shovelling out money so cheaply finance companies could rent it out not-quite-so-cheaply and think they had a business model going instead of a paper pyramid? And what was the moral hazard created by the govt’s Retail Deposit Guarantee Scheme really and truly going to encourage?1

And what about Colin’s shroud-waving over the death of 29 men in the disaster in Pike River? I could point to the big government department that nixed the company’s preference to open-cast the mine instead of creating a bomb with one exit. I could point out the mining disasters in the parts of the world who follow Colin’s prescription today—Australia (Moura and Beaconsfield), Chile (Copiapó), Poland (Halemba), Russia (Ulyanovskaya), Canada (Westray), United States (Quecreek and Upper Big Branch) and South Africa (too many to mention)--not to mention the wholesale disasters of the past in the Soviet Union and China.

And I could point out the 181 people killed in NZ in coal mine disasters long before this mythical age of deregulation (the last before Pike River being the 19 miners killed in the Strongman mine in 1967).

imageBut perhaps the most important point to make is about risk and why people take it—and why they take more of it when they think someone (especially a government) has their back covered. That’s why many finance companies thought they were safe enough to take risks—they  had the government’s guarantee to protect them. That’s why builders, architects and home-buyers thought they were safe and weren’t taking risks—they had the Building Act, the Building Industry Authority, the Department of Building and Housing, the New Zealand Building Code, the Building Research Association of NZ and the consent processes and inspections of Territorial Authorities to protect them. That’s why so many banks thought they were safe to be pumping out all that counterfeit capital to keep the housing bubble going—because the govt’s Reserve Bank and credit-rating agencies with govt-granted monopolies told them all was well, al was safe, all was under control, when it wasn’t.

In short, the more government regulation there was, the less folk thought they needed to regulate themselves—because if Big Brother is doing it as swimmingly as Big Brother says he is, why need we do so ourselves?  So roll on that short-term thinking that causes disasters. 

Mark Thornton observes about the phenomenon:

The public is told that regulators do not cause problems; they prevent them. They police the economy. They are the watchmen that have been endowed with the wisdom, ability, and selfless devotion to the public good.
    There are indeed many people who work as government regulators that are very smart and well-trained that have public spirit and the public good in their hearts. There are also plenty of cads and knuckleheads that work as regulators [some of them now scurrying for their lives in the Ministry for Primary Industries].
    The problem with government regulation is that you cannot fine-tune the regulations: nor can you perfect the regulatory work force in such a way to make regulation work in anything but a superficial way. The truth is that regulation instills confidence in the public so that they let down their guard and makes them less cautious while at the same time distorting the competitive nature of firms in the marketplace.
    After every economic crisis there are calls for new regulations, more funding, and more controls.
Economic wisdom dictates that we be ready to contest those calls when the next crisis of the interventionist state occurs.

Colin is speaking in good faith about the effect of all these disasters, and in good faith he thinks he sees both the cause and the solution, but his failure to clearly analyse their causes and his proposed solution is a disaster for someone who sells his commentary as professional analysis.

Perhaps the clearest point illustrating his obvious ignorance is his invocation of poor old Adam Smith as the man responsible for all this. The “one lesson” Colin thinks we should all draw is “that pure market theory, Adam Smith's Invisible Hand … is bunk.”

Poor old Adam Smith and his little-understood metaphor, invoked by so many to prove their arguments that are otherwise so lacking.  Colin just joins a long list of folk who berate the metaphor while never learning what Adam meant by it.

"It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest," said Old Adam. The butcher, the brewer and the iPod-maker "direct [their] industry in such a manner as [their] produce may be of the greatest value," and we are the beneficiaries of their labours and their trade -- each intends only his own gain, but by the blessing of trade he is, said old Adam, "led as if by an invisible hand to promote an end which was no part of his intention."

The “invisible hand” of Colin Espiner’s nightmares is simply a metaphor for the process in which people voluntarily buy and sell, in which process is discovered who values what the most—who is prepared to put their money where their values are, how much that makes resources worth, and what (therefore) producers should produce more of.

And contra Espiner, that is the only real place and process in which to discover exactly how much (or maybe how little) people value what we go out every day to produce. The more government regulation there is in the way of that process, the less coordination there is between brewer and baker, and the less do those values get reflected—and the more does self-regulation get thrown out the window.

Not to mention the extent to which, as Adam Smith most famously recognised, the extent to which the brewer and baker and building materials suppliers will embrace with enthusiasm the rent-seeking and monopoly grants available to them by regulatory capture.  (“To widen the market and to narrow the competition, is always the interest of the dealers,” he obseved.)

And these are the real risks of Mr Espiner’s new-found paradise on earth. Far more real than the myth of deregulation he’s digested from those who know (or should know) better.

* * * *

NOTES:

1. The Myth of Deregulation is so all-fired powerful that even hard-bitten journalists who think they’re immune to such things have bought the myth wholesale. Despite the obvious evidence right in front of their eyes, they’ve bought the idea, especially, that for the last decades we have had “completely free markets and capital flows.”  Free markets! What are they smoking! These hot-shot economics reporters are apparently blind to the fact that in the markets of the last decades there has been virtually no price or profit relationship left untouched. You think the age of Muldoonist price controls and interference with profits are dead?  In the last few decades the “orthodoxy” worldwide has overseen:

  • interest rates controlled by an economic dictator with powers Muldoon would have killed for;
  • specific interest rates, such as home mortgages, manipulated through subsidies as well as price controls;
  • indirect currency controls virtually everywhere;
  • direct government manipulation of the gold market by both world govts and the IMF;
  • asset price floors—in addition to the ‘Greenspan put,’ we’ve had money printed and “toxic” assets bought, anything to keep asset values raised ;
  • wage floors, essentially a guarantee of widespread unemployment in a downturn;
  • wage ceilings, especially for executives;
  • direct price controls, especially in medicine and education;
  • good old-fashioned protectionism—not just currency manipulation, but outright tariff and non-tariff barriers;
  • the dismissal of business bankruptcy and liquidation as “old-fashioned”;
  • pumping up illusory profits by inflating the money supply, creating an inflationary illusion of profitability and prosperity;
  • the grant of virtual monopoly powers to the very credit agencies that didn’t know a bad thing even when it was held right under their nose.*

These are just a few of the means by which govts ran price controls and interference with profits in recent decades—and still are.  But Colin Espiner, Bernard Hickey, Fran O’Sullivan and hundred of thousands of others trained to view all this as part of a “free market” are too braindead to see them for what they are, and  with the failure of this system of control they call instead for the controls to be tightened!

They have the frankly braindead notion that somehow the people in govt responsible for creating, overseeing and extending this economic disaster need to “take back” the reins they never gave up.  They have apparently either lost the brains they once had, or have now reached the point (as it has with most educated in mainstream economics) where the real world has outstripped their learning, so have resorted to the siren cry of the braindead everywhere: “Bring me more big government! Now!!”

3 comments:

  1. Yes he is quite right and everybody has been under a grave misapprehension for decades.

    30 years ago - 1983 - New Zealand was a paradise and the envy of the world and we should immediately rush 'back to the future' to recreate that New Zealand.

    Let's ban imports and make everything here in 'paradise' like we used to - transistor radios cost $200, shoes $150, shirts $90, loaves of bread for $6, washing machines $1300, cars $20,000, television sets $1000 (oh just remember we have had 300% inflation since then so multiply everything by 3 to see how much it will cost you to live ...in paradise)

    We will have trade unions getting really bolshie and on strike most of the time for "capitalist exploitation" such as - the member of one union picking up a rag off the ground when that is the job of a member of the other union; or being asked to actually turn up and do 8 hours of work.

    The following consumer products were banned in 1983 mainly because Rob Muldoon didn't like them so decided nobody else did either -
    orange juice(!), TV3, milk in cartons, shopping malls, cordless phones, cafes, coffee, olives, Burger King, post-it notes, digital cameras, Filofaxes, walkmans, etc etc etc

    We had tax rates of 66% so poor people could feel good about their lot in life - except none of the rich people actually paid them.

    We also had vast numbers of public servants enforcing all manner of REGULATIONS - so rejoice! Colin scores!

    All we need to do is go back in time and all will be well.

    Afterall - it is not as if socialists, trade unions, talkback callers, no hopers, losers, left wing intellectual journalists were whingeing and moaning in 1983... oh hang on!

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  2. Yes, excellent post. Mr Lineberry covers superbly what I was going to write. Could add that under the wizardry of Muldoon that all the socialists clamour for, NZ was sort of $broke. Whenever Clark & Cullen huurrumphed about the failed policies of the past ["Rogernomics]; they presumably meant Muldoonism worked wonderfully and needed no changes.
    There's an advert for TV program on Socialist TV[3] 29/8/13 about the gap between rich and poor and it's all Roger's and horrible capitalists fault that there is mass starvation, which has never happened under socialism. Never let facts get in the way of a good [sob]story
    Peter

    ReplyDelete

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