Economic Ignorance And The 4 Biases (Manufacturing Edition)

In Bryan Caplan’s Myth of the Rational Voter, he talks about the four biases that highlight where economists and non-economists diverge. For example, almost all economists would agree that free trade is welfare enhancing. Opposition to free trade (the TPPA ain’t free trade because of the lobbyist involvement) is perhaps the best “tell” for economic ignorance.

The four biases as Caplan sees them:

  1. Make-work bias – doing something is better than doing nothing
  2. Anti-foreign bias – when we sell something to a foreigner, we lose
  3. Pessimistic bias – everything gets worse over time
  4. Anti-market bias – markets fail and constantly need intervention

While there is some truth to the fact that economists are generally better off than non-economists, and could be expected to support policies that make them better off, there is definitely a reluctance on the part of non-economists to acknowledge the trade-offs between different choices government makes. In fact, they want to be ignorant because in-group status matters more than the truth to non-economists.

Some people use the phrase “choices society makes”, but I don’t agree with that because a democracy tends towards policy that reflects the preferences of the median voter. The median voter is rationally ignorant and votes based on inaccurate preferences and biases – they’re highly likely to support the findings of the manufacturing inquiry report produced by the troika without even questioning the assumptions and conclusions contained in it.

The choices policymakers make with respect to economic policy are in a vacuum without reference to those best able to make informed decisions. Trying to win over people who have absolutely no willingness to acknowledge that opportunity costs matter and that central planning never works is not possible. Informed voters votes are cancelled out by the sorts of people who think that SKY TV is responsible for the demise of Mediaworks. (Seriously Clare Curran have you not heard anything about how leveraged buyouts entail a lot of leverage? Do you even know what a private equity firm does?).

In fact, I’ll go even further. The manufacturing report released yesterday was a product of non-economists. That economists were involved in its production does not an economic report make. Just take a look at BERL – obviously an organisation happy to put their name to nonsensical stuff that flies in the face of what the manufacturing report called “orthodox” economics. I think the report uses “orthodox economics” as a kind of buzzword that triggers people with weak ability to process emotions and get them all worked up about things they don’t want to know about like an independent monetary policy and how “cost plus” manufacturing is for businesspeople who don’t have a clue about how the world really works.

But that’s not what matters to the leaders of Labour, the Greens and NZ First. They produce these sorts of reports because they love trumpeting statistics and numbers. The fact that they’ll be able to generate soundbites for the campaign that “manufacturing needs central planning” when it is actually rebounding and producing more with less labour (a good thing), is the most important. The latest PMI numbers are good – better than China and Australia in fact. (PMI numbers are out of 100).

They’re not economists, so we shouldn’t treat them as such. Political discourse is not an adult discussion where facts and figures are examined based from a world view backed up by a whole body of knowledge that despite its post-GFC critics offers a lot of potential to help people understand trade-offs and how having to find something other than a production line job isn’t the end of the world.

The manufacturing inquiry is nothing more than a cynical political stunt that enables the troika to leverage economic ignorance and anti-foreign bias to earn rents in the form of a few years of Ministerial salary bumping up their Parliamentary superannuation balances. They also get to fly around the world a lot gathering information and giving speeches. To think that the baubles of office aren’t a massive incentive to say whatever it takes to get elected is to think that people don’t respond to incentives.

The report wants central planning for manufacturing. Without acknowledging that manufacturers are more productive than ever now that manufacturing businesses that don’t add enough value or can’t manage exchange rate volatility correctly have been liquidated through a process of creative destruction, it’s time for another taskforce!

If there’s something the New Zealand political class are world class at, it is organising taskforces and working parties for officials. The Productivity Commission, the Jobs Summit, the Knowledge Wave, the Capital Markets Taskforce and whatnot. All a lot of hot air.

The manufacturers who supported this inquiry are rent seekers. They want the troika to change the structure of the New Zealand economy so that firms who have a comparative advantage in something other than manufacturing are disadvantaged. That is the trade-off.

Why do we need manufacturing anyway? I am not convinced that the spillover effects that the report tries to tell us about exist. There are already some successful manufacturers in this country. They’re doing it without much government help, and therefore don’t need extra assistance. All the others can go to the wall. Life is not fair, you can’t recover the sunk costs of a failing manufacturing firm. There is no sense in throwing good money after bad.

The report’s discussion of exchange rates and managing volatility is abysmal. They suggest that offshore investors would prefer fixed exchange rates. That is completely in contradiction with floating exchange rates enabling rapid reallocation of capital from where it earns a low return to where it earns a higher return being the way of our globalised financial system.

It is also economic ignorance to call for fixed exchange rate “to help manufacturers”. The majority of New Zealand benefits more from a high NZD because pretty much everything cool is made overseas and made overseas for a reason. Lowering the NZD for exporters benefit is sacrificing consumer welfare on a cross of exports.

I am looking forward to how these parties try and use flawed, stupid, illogical NZ Inc thinking, to justify interventionist policies in the run up to the election. It is simply not acceptable to produce political propaganda like this that does not include discussion of the trade-offs faced in preferring manufacturers over other sectors. Economic ignorance must be reduced to stop silly buggers on both sides of the House from trainwrecking the New Zealand economy.



No Need For A Car “Tsar” Or Tariffs

Concerns over the viability of the Australian automotive industry have escalated in the wake of Ford’s decision to pull out. There have been calls for a return to higher import tariffs, moves to artificially deflate the dollar, and even for appointment of a car ”tsar” to stop the industry from sinking.

Source: Sydney Morning Herald

Where to start with such a blatant display of anti-foreign bias and anti-welfare enhancing trade bias?

The decision about whether or not Australia needs an auto industry is made at the local dealerships.

Over the past few decades, Australian consumers have moved away from buying Holdens and Fords.

For consumers at the top end of the market, they’ve earned so much money that they’d prefer an Audi or a Range Rover.

For consumers at the bottom end of the market, they’re happy with imported used cars.

For consumers in the middle of the market, they prefer Hyundai and Toyota to Holden or Ford.

If Australian consumers actually wanted an auto industry, they’d ignore the relative cheapness of imported cars and only buy Australian.

They haven’t, so they obviously don’t value having a home grown auto industry.

Politicians who have the interests of their union supporters to look after are happy to use Other People’s Money to prop up a sunset industry.

When it comes to consuming new cars, Australian consumer’s preferences have been revealed.

Making Stuff Is Expensive

Making physical stuff is expensive.

Ford in Australia, after decades of protectionism and subsidies, has finally decided that the stuff it makes is too expensive. From 2016 about 1200 people will no longer have jobs in the auto industry.

When you add in the fact that Ford vehicles are expensive to make relative to vehicles made in Korea and Japan, you have to wonder why people haven’t gotten over worship at the altar of making stuff and exporting stuff.

That golden goose was killed a long time ago when big corporations and big labour realised that they both wanted the same thing from governments all the way from Michigan to Melbourne – as much free stuff they could get.

A special interest group can collaborate and lobby the government because it has fewer relationships to manage. The few win out at the expense of the many. Consumers pay more for cars so union workers earn wages that aren’t justifiable or sustainable.

The poor old taxpayer and average working stiff cannot collaborate and get free stuff because they are buggered from their 40-50 hours a week working hard to pay the taxes that pay for the free stuff.

Making stuff is expensive, and only companies that can turn a profit making expensive stuff should be operating.

If they need “special rules” or “special subsidies” or “special trade criteria for competing goods” then they shouldn’t be in business.

New Zealand is fortunate that our cut throat manufacturing sector has killed off the bad businesses and let the ones who actually deliver high value to consumers survive and thrive even in the face of a high NZD.

Australia is less fortunate, because the ALP scandal in New South Wales at present is showing anyone who can look on the ICAC website that big business, big developers and big labour are really good mates, mate.

Let’s be honest – the only people who will miss Australian car manufacturers are the sort of people who care about whether they are “Ford” or “Holden”.

They obviously didn’t want to support Ford or Holden enough when the relative price of a Toyota or Hyundai made it financially stupid to “buy local”.

Price theory can explain all of this, but don’t expect someone who thinks this is a terrible day for Australia to take the time to learn basic economics.

Why A High Exchange Rate Is Good

A high exchange is good because it increases New Zealand’s global purchasing power.

Because our grey-haired corporate elite have consistently failed to innovate outside of a handful of well run companies, we desperately rely on imports for the cool things we can’t make here.

This means that a high exchange rate papers over New Zealand’s pathetic track record in economic growth and “100-bagger” innovation.

It also means that the most marginal manufacturers will go to the wall because they’ve failed to add enough value to make exchange rate changes unlikely to erode their margins.

If I was a manufacturer in New Zealand, I’d be asking – how can I reimagine my entire business so it is still profitable if 1NZD = 1USD? How can I move from razor thin margins to fat margins that reflect enormous value creation?

We have no idea what will happen to the exchange rate because of the massive liquidity bubble sloshing around the globe because of quantitative easing in the US.

But if you fail to build in the possibility of dollar parity to your business model, you deserve to go to the wall. You have no right to blame a high exchange rate for your inept business management.