Economics 101: Socialism does not trump real economics

Your Editor noted, appropriately enough on last Bastille Day, the promise of French Labor Minister Michel Sapin to “make layoffs so expensive for companies that they are not worth it.” The original noted this article as well:

French president says Peugeot layoffs are unacceptable

Associated Press, July 15, 20121

PARIS — President Francois Hollande on Saturday denounced a plan by carmaker PSA Peugeot-Citroen to cut 8,000 jobs as unacceptable and said it must be renegotiated.

The struggling French carmaker announced the cutbacks Thursday, along with its intention to close a major factory north of Paris. Employees staged a protest the same day, and unions are calling for more.

In his Bastille Day interview on French television, Hollande said the plan was a “shock” for workers, their families and their communities.

He told two interviewers from the major television networks TF1 and France-2 that the “plan is not acceptable as it stands and therefore it will not be accepted.”


Peugeot Citroën Reports Record Loss

PARIS—PSA Peugeot Citroën UG.FR +7.29% Wednesday reported its largest-ever annual loss but said it is poised to rebound as it slashes costs and rejuvenates its model lineup to adapt to the depressed European automobile market.

But the scale of last year’s €5.01 billion ($6.74 billion) loss from a €588 million profit in 2011, largely because of massive write down on the value of its automotive business, shows how stiff a challenge Peugeot faces to get through the next two years. The first major benefits from Peugeot’s one-year-old cost-saving and product-development alliance with General Motors Co. GM +0.18% kick in only from 2015.

Industry executives acknowledge there is no sign as yet of demand for new cars in Europe pulling out of a five-year slump. Peugeot forecasts up to a 5% decline for the European market in 2013. The market shrank by nearly 9% last year as the region’s economic malaise and changing consumer habits dented demand for new cars.

Some industry experts aren’t so sure that Peugeot will survive without more radical restructuring or fuller government financial support despite its balance-sheet cleanup, a tough restructuring plan for its European operations and stronger positioning of its brands. The car maker had €10.6 billion in cash and credit lines at Dec. 31 as well as government guarantees for loans to its in-house financing arm.

More at the link.

This site noted yesterday that the Socialist model of President François Hollande, and his promise to eschew austerity and promote a Keynesian “pro-growth” agenda was failing; even the anemic 0.8% growth on which his promises were based wasn’t going to be met.

As much as your Editor would like to be able to claim some great brilliance and tremendous prescience, understanding that socialism just does not work and cannot work requires no more than plain, common sense. That Peugeot was going to lose, lose, lose if the government wouldn’t allow the restructuring needs, including layoffs, of that company is Economics 101, not some graduate level course; that the government placing political desires ahead of economic realities is always going to be a loser; the best for which the socialists can hope — though they never seem to realize it — is that the big losses might be a few years down the road instead of immediate.

And so we come to our own President, and his State of the Union address. In it, he pushed a lot of typical liberal ideas, and said, in effect, that the Republicans should mostly go along with him. It might make sense . . . if liberal policies actually worked. But we had his policies, we went along with his huge stimulus plan, and they clearly failed to deliver the results we were told that they would produce. The President touted what he claimed were his achievements, but looked at his claims, and found them wanting, at best:

  • The president claimed that “both parties have worked together to reduce the deficit by more than $2.5 trillion.” But that’s only an estimate of deficit reduction through fiscal year 2022, and it would be lower if the White House used a different starting point.
  • Obama touted the growth of 500,000 manufacturing jobs over the past three years, but there has been a net loss of 600,000 manufacturing jobs since he took office. The recent growth also has stalled since July 2012.
  • He claimed that “we have doubled the distance our cars will go on a gallon of gas.” Actual mileage is improving, but Obama’s “doubled” claim refers to a desired miles-per-gallon average for model year 2025.
  • Obama said the Affordable Care Act “is helping to slow the growth of health care costs.” It may be helping, but the slower growth for health care spending began in 2009, before the law was enacted, and is due at least partly to the down economy.

And now, the President wants to do more of the same. He called for major investments in our infrastructure, but that was what the 2009 stimulus plan was supposed to do, and got some little accomplished, at too high a cost, all on borrowed money, and without yielding the economic results we were promised. He wants to concentrate on jobs — a strange thing, since he let his own jobs council lapse without having even met for half a year — but while he talks about job creation, his actions, in the form of increased regulatory burdens and higher taxes, make it harder for businesses to grow and create jobs. The President simply does not understand employment and economics.

An example: the President complained that too many lower income families, families which still have good credit, who might want a mortgage but cannot get one. Yet it was the easy credit and the extension of mortgage loans to people who could not afford them which led to the mortgage crisis which pushed our economy into recession. The credit industry reformed, and went to much sounder lending practices, something which should be applauded, but the President wants to go back to the things which helped get us into this mess in the first place.

Another example: the President said:

But for the sake of our children and our future, we must do more to combat climate change. Yes, it’s true that no single event makes a trend. But the fact is, the 12 hottest years on record have all come in the last 15. Heat waves, droughts, wildfires, and floods – all are now more frequent and intense. We can choose to believe that Superstorm Sandy, and the most severe drought in decades, and the worst wildfires some states have ever seen were all just a freak coincidence. Or we can choose to believe in the overwhelming judgment of science – and act before it’s too late.

The good news is, we can make meaningful progress on this issue while driving strong economic growth. I urge this Congress to pursue a bipartisan, market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago. But if Congress won’t act soon to protect future generations, I will. I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.

The very policies he wants to enact, via legislation or regulation, would add uncounted billions of dollars in additional costs for energy, taking money out of the pockets of businesses and individuals, to produce nothing more than they are already buying, for a hope that this will somehow reduce CO2 emissions and save the world. If you have to spend more of your take-home pay for the same amount of electricity you already use, if you have to spend more hours of your workweek to pay for the same amount of fuel that you are already using, then you will have less available for the purchase of consumer goods, which will depress the economy. It’s simple economics: if you must spend a higher percentage of your pay on necessities, you will have less for luxuries, less for the other consumer goods the President wants you to buy.

A President who understood economics would realize this; our current President does not. Perhaps in four years, we will have a President who will be able to help — or at least not hinder — our economy, but, until then, we are stuck with a man who doesn’t understand what he is doing and simply is not up to the job.

  1. A post dated article.

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