16 May A Finite Supply of Ruin
It is not difficult to see what must be the consequences when democracy embarks upon a course of planning which in its execution requires more agreement than in fact exists. The people may have agreed on adopting a system of directed economy because they have been convinced that it will produce great prosperity. In the discussions leading to the decision, the goal of planning will have been described by some such term as “common welfare,” which only conceals the absence of real agreement on the ends of planning. Agreement will in fact exist only on the mechanism to be used. But it is a mechanism which can be used only for a common end; and the question of the precise goal toward which all activity is to be directed will arise as soon as the executive power has to translate the demand for a single plan into a particular plan. Then it will appear that the agreement on the desirability of planning is not supported by agreement on the ends the plan is to serve. The effect of the people’s agreeing that there must be central planning, without agreeing on the ends, will be rather as if a group of people were to commit themselves to take a journey together without agreeing where they want to go: with the result that they may all have to make a journey which most of them do not want at all.
It may be the unanimously expressed will of the people that its parliament should prepare a comprehensive economic plan, yet neither the people nor its representatives need therefore be able to agree on any particular plan. The inability of democratic assemblies to carry out what seems to be a clear mandate of the people will inevitably cause dissatisfaction with democratic institutions. Parliaments come to be regarded as ineffective “talking shops,” unable or incompetent to carry out the tasks for which they have been chosen. The conviction grows that if efficient planning is to be done, the direction must be “taken out of politics” and placed in the hands of experts – permanent officials or independent autonomous bodies.
F.A. Hayek, The Road to Serfdom, 1944.
In yesterday’s note, we quoted from the scene in The Godfather in which the heads of the Five Families meet, along with mafia representatives from around the country. Among those in attendance (and one whom we cited) was Don Joseph Zaluchi from Detroit.
To the modern viewer/reader, the inclusion in this scene of an Italian mob boss from Detroit might seem a little strange. Detroit? But there aren’t any Italians there. And more to the point, who cares? It’s Detroit. There’s almost no one and nothing there at all. Los Angeles and Kansas City (the other cities mentioned by name) we get. But Detroit?
What the modern viewer/reader needs to remember is that The Godfather was written in 1969, and the events it depicts took place from 1945 to 1955. And at that time, Detroit was a big deal. Indeed, it was the biggest of all deals, literally the wealthiest city in the world. Read that again: the wealthiest city in the world.
Today, of course, Detroit is the poster child for urban decay, the great decomposing and decrepit example of how fleeting prosperity can be in the face of poor governance and aggressive “planning.” In less than a quarter century, Detroit went from the richest city in the world to the poorest city in the country, where it has stayed now for more than four decades.
We’ve been thinking about Detroit lately for a couple of reasons. The first of these is Chicago, the third largest city in the nation and one of its proudest and, historically, strongest metropolises. Over the last few years, however, the city has fallen into violence and disrepair. And it’s only going to get worse. New Mayor Brandon Johnson was sworn in yesterday, and he threatens to go down in history right alongside Coleman Young, the man who put the dagger in Detroit’s weakened heart:
Companies are already vowing to leave Chicago over additional taxes promised by its new mayor – a progressive newcomer tasked with addressing the city’s dwindling image under predecessor Lori Lightfoot.
Sworn in early Monday, Mayor-elect Brandon Johnson beat out more moderate Chicago schools CEO Paul Vallas earlier this month to earn the hallowed spot – something business leaders like CME Group Inc are already peeved about.
Appearing on a podcast Sunday, the chief executive of the country’s foremost financial derivatives exchange, Terry Duffy, voiced his distaste over additional taxes planned by the ex union organizer, whose upset win was endorsed by Bernie Sanders.
Intended to dig the city out of its current financial hole, the increases are aimed at high earners and companies headquartered in the Windy City – whom, as CME is already proving, are likely to put up a political fight.
Apart from the array of tax increases, Johnson – a relative unknown in a heated mayoral race – has his hands full after taking the reins Monday, facing an influx of migrants in need of shelter and summer months that historically breed violent crime.
Speaking to the Odd Lots podcast about 24 hours before the ceremony that will see the former Chicago schoolteacher succeed his similarly aligned predecessor, Duffy made it clear his firm is willing to join several businesses like Tyson, Caterpillar, and Boeing in relocating, if Johnson does not heed his and others’ warnings.
‘Mr. Johnson has no legal authority to impose a transaction tax on my business,’ said Duffy, adding that the relatively green politician should focus on the gargantuan task of fighting the city’s crime epidemic instead of putting the squeeze on businesses.
Duffy – whose firm is worth an estimated $66billion and is responsible for both Chicago and New York’s mercantile exchanges – sarcastically sniped Johnson should not ‘get too bogged down on how he’s going to short-term think’ the slipshod plans.
He added of Johnson, who for the past four years served as a commissioner in crime-ridden Cook County: ‘He’s going to raise taxes on certain people in order to fit his agenda.’
Chicago has a fight on its hands. And as Detroit has shown, it’s exceptionally difficult to overcome poor leadership, especially when it is imbued with an unshakable faith in the economic dogma of planning.
The second reason that we’ve been thinking about Detroit is the case of another once-powerful polity that risks slipping into economic decrepitude. Whereas Detroit is formerly the richest country in the world, brought low by economic shortsightedness, this polity formerly ruled the world and, indeed, created the modern world as we know it, including providing the blueprints for industrialization and capitalism. But now it too faces the destruction caused by centralized planning and economic illiteracy:
As the UK buckles under the strain of anemic growth, strikes, fraying infrastructure and record hospital waiting lists, Jason James thinks back to another economic crisis that dominated an earlier part of his banking career: Japan’s infamous “lost decade.”
James, 58, spent the 1990s working for HSBC Securities in Tokyo’s Nihonbashi financial district. It was a period that suffered a 60% slump in stocks and a collapse in land values that led to zombie banks and an economy overwhelmed by bankruptcies and bad debt.
But his conclusion is that Britain in the 2020s feels worse.
“The system kept working, the trains kept running,” he said. “I don’t think you ever had the sense that everything was falling apart in the way you’ve got here.”
His perception of economic decay is backed by the numbers. Bloomberg analysis of official data and Bank of England forecasts shows UK growth will average 0.8% a year between 2016 — when Britons narrowly voted to leave the European Union — and 2025. That’s below the average 1% in Japan from 1992 to 2001, the “lost decade” often cited amid warnings of “Japanification” whenever a country endures a prolonged slowdown.
Dire productivity, crumbling public services and a worsening labor supply form the backdrop to Chancellor of the Exchequer Jeremy Hunt’s budget statement on Wednesday, and despite a recent run of stronger-than-expected growth, point to a long-term drag on an economy in which animal spirits are fading.
Interestingly, but not surprisingly, the members of the Smart Set ® are convinced that the problem with Britain’s economy is Brexit and, therefore, the solution is to rejoin the EU, to “reinvest” in global institutions. We’d argue that the problem is precisely the opposite, that Britain’s leaders – in BOTH parties – are willingly and happily committing economic suicide specifically to remain in good standing with the “global community,” which has decided that it is absolutely necessary for man to save the world by killing himself. Britain’s energy and economic policies are centered around “climate change” and the supposed necessity of going carbon-neutral by 2030. Indeed, Britain has, over the last few years, built its reputation on being a leader in this effort, a shining example to the rest of the global community. Two years ago, The Economist published a story lauding the UK for being such a bold and potent leader in decarbonization:
The elimination of power stations that burn coal has helped Britain cut its carbon emissions faster than any other rich country since 1990 (see charts). They are down by 44%, according to data collected by the Department for Business, Energy and Industrial Strategy (beis) during a period when the economy grew by two-thirds. Germany’s emissions, in contrast, are down by 29%; coal is still burned to generate some 24% of its electricity. Britain has made cuts to its emissions 1.8 times larger than the eu average since 1990. In America, emissions over the same period are up slightly.
The catch, of course, is that the Brits got rid of their coal but didn’t replace it with anything reliable, much less cost effective. Today, therefore, Britain is reeling not just from deindustrialization caused by energy starvation but also from rampant inflation that is derived, in large part, from energy deprivation. And all of this was accompanied and exacerbated by economic stupidity on stilts: energy price caps.
As Britain tumbles into economic oblivion and Chicago threatens to do the same, it is worth remembering not only that it CAN happen here but also that it can happen quickly. One hundred years ago, Britain ruled the world. Seventy-five years ago, Detroit ruled America’s cities. Today, by contrast, both are economic basket-cases.
There may be, as Adam Smith, once noted, “a great deal of ruin in a nation,” but there is not an infinite supply.
