Targets And The Communist Utopia
It feels like an era of communist utopia has returned. A time when central planning ruled and the drive to meet targets pushes all obstacles aside.
Obstacles like the principles of finance, economics, engineering, and physics, just to name a few.
Zealotry replaced thoughtful policy in pursuing goals that had to be met.
The way we are going about the energy transition is a good example. It is not the only one.
We want to reach net zero emissions of greenhouse gases by 2050. Let’s use as a mechanism to get there another target of 43% below 2005 levels by 2030.
If the collateral damage to this is to cause rationing and spiralling energy prices in the meantime, we shouldn’t let this deter us from our target. We should simply throw more resources at the problem.
Targets Or The Price Mechanism
This is where we differ from the communist utopia pursued by the USSR during the Holodomor or the Great Leap Forward by the PRC.
Those two societies outlawed the capitalist market system and used targets as part of their communist utopia. This led to countless millions of hideous drawn-out deaths through starvation. The tools they used were collectivisation, better described as mass confiscation and deportation.
Methods used in a capitalist market system that would cause havoc at scale are two-fold. The first entails using price distorting mechanisms that destroy the efficiency of markets.
The second is to confiscate capital through profligate government borrowing. This will crowd out the private sector while placing the burden of servicing the debt on future generations.
High Costs and Debt
Debt, when used properly, is a useful tool. It can play the role of increasing potential and actual output, as well as smoothing out the difficulties of the business cycle.
Unfortunately, it is a two-edged sword which can lead to chronic stagnation when overused.
A recent study by EY provides a prescient summary of points in its brief at the beginning of the report.
The study finds that:
- Measures taken during the COVID-19 pandemic are taking a toll on public finances around the world;
- The public sector is growing as a share of the Australian economy;
- Commonwealth and state budgets will have structural deficits over the coming years leading to rising debt; and
- Public sector investment is creating competition for the private sector investment. Especially in the demand for materials and labour. It is pushing costs higher.
The last point is worth emphasising. Consider the Snowy Hydro 2 pumped hydro project. When the Turnbull government touted it, initial estimates of its costs were $2bn. This has escalated to $12bn, with recent reports even citing $25bn and doesn’t look like being completed until 2028. The opportunity cost is massive. All to make an absolutely negligible difference to climate change.
Can we expect the same cost blow-outs as they build the poles and wires necessary to transport energy from far-flung solar and wind turbine projects? I think you can bank on it.
We are a country that had to stop making motor cars because of the excessive subsidies required. We would now struggle to make a toaster, but we wish to make nuclear-powered submarines.
The NDIS has developed a life of its own and is at war with the concept of containment. This is another blowout by the commonwealth government that must fund it.
Commonwealth and state government expenses have consistently outpaced revenue as a share of GDP since the global financial crisis of 2008.
The size of shortfalls or windfalls constantly surprised our professional forecasters at the important economic agencies of the Federal Treasury and the RBA. Even when the forecasts are for only a few months into the future.
The EY study is the subject of an article in The Australian. It shows that even the measures the government is taking to help counter the effects of inflation on the households is feeding into inflation. It seems the problem is the cure.
Higher Interest Rates
In an earlier article, I have said that these pressures are showing up as an inverted yield curve. My argument is that the inverted yield curve may not be a sign of looming recession as it normally is.
It is more likely to mean higher interest rates for much longer than expected, as the demand for capital by governments around the world is insatiable.
The cause of this demand is the drive towards targets whose aim is to divert the trajectory of economic growth away from its natural path. Our version of a communist utopia.
It is a method that involves taking big bets in markets by picking winners and interfering in the price mechanism in an ad hoc manner.
It eschews economic principles that could help lead us to a preferred destination with more limited collateral damage. Things like a cap-and-trade mechanism for greenhouse gas emissions.
The planning towards communist utopia that led to disasters mentioned above eventually ended. Because they completed collectivisation, in which case it led to generations of rationing in the USSR. Or because they jettisoned it and eventually allowed a price mechanism to direct the market in the PRC.
In our capitalist system, the change is likely to be led by the demands of the financial system. If we do not bring the growth in debt back below the growth of the economy by embracing reforms or curtailing public expenditure, capital markets will act.
They are already providing warnings through the inversion of the yield curve. Bond markets are demanding higher long-term interest.
While governments do not go bankrupt like individuals or business entities, they are still subject to manias, panics, and crashes.
In A History of Financial Crises by Charles Kindleberger, who wrote the classic text on manias, panics, and crashes, he outlines the five phases of a bubble.
That is a book worth reading. A piece of dialogue written by Ernest Hemingway over a hundred years ago in his 1926 novel, ‘The Sun Also Rises’ offers a neat summary of how the process unfolds.
The dialogue is:
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
Let’s hope we don’t hit the ‘suddenly’ part of the equation on the way to our version of a communist utopia.
