The First Five-Year Plan

The Obama Administration’s economic policy is beginning to take form and I genuinely wonder if those who supported his election are beginning to have second thoughts. The auto production commissars have decided to limit Chrysler’s marketing expenses:

DETROIT ( — Chrysler wanted to spend $134 million in advertising over the nine weeks it’s expected to be in bankruptcy — the U.S. Treasury’s auto-industry task force gave it half that.

So if GM, which is wrestling with the possibility of a Chapter 11 filing itself, is wondering how much influence the task force will have over marketing, the answer is: plenty. However, transcripts from the U.S. Bankruptcy Court for Southern District of New York, where the Chrysler case is being heard, proved for the first time that the task force at least understands that advertising is a necessary expense — even if it doesn’t think Chrysler needs $134 million for nine weeks of car ads.

while the financial sector commissars are determining how those working in the sector should be compensated:

WASHINGTON — The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter.

The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance.

Administration and regulatory officials are looking at various options, including using the Federal Reserve’s supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.

Among ideas being discussed are Fed rules that would curb banks’ ability to pay employees in a way that would threaten the “safety and soundness” of the bank — such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing “best practices” to guide firms in structuring pay.

Should we expect newspaper commissars, aerospace commissars, women’s wear commissars?

I don’t have any idea how much Chrysler should spend on marketing or how people in the financial sector should be paid but I seriously doubt that a group of people who have been career politicians, party apparatchiks, academics, and holders of sinecures and have never met a payroll or run a business do, either. I’ve got to admit that I do have some ideas on financial sector compensation schemes, however. I don’t have any objections to people receiving any level of compensation that they’ve actually earned. However, I believe that commissions on the sales of complicated financial instruments should be sold based on the life of the instruments rather than year to year. At least that’s something that can be measured rather than the unmeasureable “quality”. How a group of amateurs however talented are able to determine best practice is beyond me.

The obvious retort to that is that the professionals haven’t done such a hot job. That’s a non sequitur. It does nothing to establish that the Obama Administration can do a better job.

I can say with confidence that industrial policy whether in Soviet Russia or Japan or even today’s China has never been successful at creating prosperity. There are well known reasons for this. As I’ve noted before economics is a descriptive science not a predictive one. Its limitations in predicting are pronounced. We know how to produce scarcity; we know significantly less about how to produce abundance.

For those who doubt my predictions about China, I’d like to remind them that Soviet Russia was once the economic wonder of the world, too. It didn’t last. I’m quite confident that the post mortem of the inevitable collapse of China’s system will reveal the deep-seated problems that lead to that collapse.

I’m similarly certain that industrial policy will be found wanting much more quickly in the United States. I do have a certain amount of sympathy with the Obama Administration, however. What are they to do if they can’t allow unsalvageable businesses to fail? Under those circumstances the temptation to micromanage are irresistible.

4 comments… add one
  • PD Shaw Link

    re Chrysler, I can appreciate the knee-jerk reaction, undervaluing advertising. But the company is facing a severe problem with consumer confidence in its products which advertising can address. (The apparant refusal of the company to honor lemon laws tells me that consumers should not have confidence in the Chrysler warranty)

    re financial system compensation, somebody should read (or reread Liar’s Poker). Paying employees less without fear that they will go somewhere else is exactly the kind of thing management wants. Similarly, long-term compensation would discourage employee’s from leaving. Management would love this sort of environment where they don’t have to compete for labor. Unless the labor ends up going to some European firm.

  • We already have an aerospace commissar: the Defense Department. Government control over the entire defense industry is far more consequential than the Obama government’s rescue mission to save Chrysler from its own incompetence. The defense industry is notable for being by far the best in the world. Apparently despite the fact that the USG exerts so much control.

    The extent of proposed oversight is far too small to be compared to the USSR or the PRC. Neither the USSR nor the PRC stated their intention to divest at the earliest opportunity and return control to the private sector. Both of those governments controlled vast swaths of their industry while Chrysler is a pimple on the rear end of American business.

    I’d also point out that a certain Nobel prize winner and many other economists were practically begging Obama to nationalize the banks. He rejected that approach, which hardly speaks to an administration looking to write a five year plan. On the contrary, it looks very much like an administration doing the minimum necessary to keep the economy functioning.

    Comparing this situation to Communism is like comparing an EMT strapping down a hysterical patient to a slave owner . We’re not trying to enslave the free market, we’re trying to save its life.

    As for government involvement not yielding prosperity, almost all other developed nations — our lifestyle peers so to speak — have a higher degree of government control, regulation, interference than we have now, or than Obama proposes. If government involvement in the economy is inherently inimical to prosperity, why are Sweden and France such pleasant places to live?

    (I think the quasi-religious belief that private industry always knows best died around the time bond rating agencies began vouching for debt no one could even define.)

    What Obama is attempting to do is shield the larger economy, and especially workers, from the consequences of the failure of men and women who paid themselves tens of millions while bankrupting their companies. That may not be good for the long-term market-based economy in the abstract, but it short circuits a radicalization of American workers — which is very much in the market’s interest.

  • I think I see things a little differently from this, Michael. I think the Obama Administration, like any other, has conflicting goals. On the one hand they’re eager to remake things more to their liking and on the other they’re nearly desperate to restore the status quo ante. The latter is futile in my view.

    The former, as you suggest, seems to be to move the U. S. more in a European direction. I believe that’s inappropriate for several reasons the most important of which are that Europe always has the U. S. to fall back on (there is no larger economy for us to rely on), European preferences are, appropriately, different from ours, and our circumstances are markedly different from theirs.

    I don’t think it’s an accident that, even discounting the water on the books, our economy has grown faster than the EU’s and that we’ve created more jobs. Like China, we need faster growth and more job creation to prevent social unrest.

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