Probably the most important thing I learned in economics — and a keystone to my political views — is Bastiat’s what is seen and what is unseen.
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause – it is seen. The others unfold in succession – they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, – at the risk of a small present evil.
Two recent examples illustrate the point perfectly.
The first is that GM is going to emerge from bankruptcy and have a public offering. No doubt the Obama Administration will tout this as a triumph of their economic policy. What is seen is a big car company supposedly back on its feet. But Daniel Ikenson reminds us of what is unseen.
The intervention was akin to theft — from Ford, Honda, Toyota, the other automakers and taxpayers — and was highly damaging to crucial longstanding institutions in the United States, like property rights and the rule of law.
The costs of GM’s ”turnaround,” if it is to happen, will never be fully appreciated. The other auto companies were denied the spoils of competition. Had they been able to pick up the market share that the nationalized GM has maintained, then more resources would have flowed to the companies that are best at making the products that people want to buy. These are huge implicit costs–the costs that are not seen–that are happily swept under the rug by Obama administration officials.
We could have had a more dynamic car sector, thousands of more jobs and tens of billions less debt. That’s not to mention the damage done to pensions and 403b’s when the government illegally prioritized the unsecured debt of GM’s union pension obligations over the secured debt of GM’s lenders.
But what is truly unseen may be the long term damage in which the government can declare an industry to be sacred, violate the law and pour billions of dollar into it. It’s popular now among the Left because it involved car companies, the rust belt and unions. Will they be so sanguine when it’s an oil company? Or a wall street firm?
Another example is last week’s boasting by Obama of a battery company supposedly leading the way into an era of clean energy. Obama was touting ZBB, which is trying to create batteries to store energy produced by wind and solar, a process which has proven both difficult and costly.
That hasn’t stopped the Obama Administration, which has been investing willy-nilly in the commercial battery industry. And so last January, when the Department of Energy announced $2.3 billion in “clean energy manufacturing tax credits,” ZBB was one of 183 recipients—collecting $14 million.
We wonder who in government looked at ZBB’s filings with the Securities and Exchange Commission. Since going public in June of 2007, ZBB has been hemorrhaging money. The firm lost $4.9 million in fiscal 2008 and $5.5 million in fiscal 2009. In its most recent filing, in May, it said it had lost $6.9 million for the first nine months of its current fiscal year. It explained it had a “cumulative deficit” of $44.1 million and informed shareholders that it “anticipates incurring continuing losses.” It acknowledged that its ability to continue as a “going concern” was predicated on its ability to drum up additional funds.
Now it’s fine for private investors to put money into such an endeavor. But when the government does so, that tends to politicize. Money goes to companies that are connected and projects that are popular on capital hill, not necessarily companies that are well run and technology that is popular with the laws of physics. What is seen is a big company making batteries, what is unseen are the companies that could be making better ones.
An illustrative example here is HDTV. When HDTV was first being developed, companies went to the federal government demanding subsidies so they could compete with subsidized Japanese companies. Bush the First, who, unlike his son, was an actual conservative, refused. As a result, the companies went out and did it on their own. As you may have noticed, we got our HDTV eventually.
We can’t be fooled by high-minded press releases and boasts of government officials. We have to look deeper if we want to see the true impact of economic politicization. And the impact isn’t pretty.
Sigh. Remember when Democrats thought handing out subsidies to big business was a bad thing?