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US enterprises forging revolution despite state interventions: Razeen Sally in Sri Lanka
21 Dec, 2012 11:40:49
Dec 21, 2012 (LBO) - Private enterprise in the United States is transforming its economic structure using available economic freedoms despite excessive state interventions that has delayed a recovery, a top economist has said.
"It intervened far too much and misguidedly at home," Razeen Sally, a former London School of Economics professor who is now with the Lee Kuan Yew School of Public Policy in Singapore, said in Colombo.

"Perhaps more relevant to the outside world there has been more serious gaps in American leadership abroad. The biggest gap for me was on international trade. He (Obama) has been pretty defensive on trade. His free trade comes with ifs and butts."

Sally, speaking at the Lakshman Kadirgamar Institute for International Relations, said the US was the world leader in driving free trade since 1945 and that leadership has been absent in the Obama administration after the financial crisis.

Robbed Liberties

"The result is that in this vacuum, without American leadership, international trade has drifted," Sally said.

"Others have also been defensive. And there has been creeping protectionism."

During the Great Depression, the US through its Smoot-Hawley Act for example fired protectionist profiteering and delayed a recovery.

Despite these lessons, profiteering businesses are again coming out of the wood work robbing trade freedoms of people already hit by an economic downturn by waving the nationalist 'trade deficit' flag or 'loss of job' flags.

Free trade and cheaper goods increase disposable incomes, allowing more demand for goods and services to be supplied by other enterprises including domestic ones expanding employment and increasing the welfare of all.

In the current slump, Central Banks are printing money trying to push credit and at the same time raising capital ratios of banks, discouraging new lending.

'Stimulus' spending on top of bank bailouts has also worsened deficits and state debt turning what was a private credit problem, triggered by excessive loose monetary policy by the Fed and the ECB to some extent, into a sovereign credit one.

The US was facing a 'fiscal cliff' and others were already sliding down the precipice.

During the Great Depression there was a sharp spontaneous recovery in the US with unemployment falling from 24.7 percent in 1933 to 14.2 percent in 1937. The recovery was interrupted in 1938-39.

Economists including Robert Higgs, have shown that the slump was triggered by 'regime uncertainty' coming from so-called 'New Deal' state interventions by President Franklin Roosevelt that held back fresh private investment.

Freed Genius

But Sally said private enterprise in the US still had more economic freedoms that those in other countries including Europe, allowing them to forge "structural transformations."

A case in point was the revolution that is being wrought in the energy sector by the lack of restrictive state interventions in the US compared to other countries.

"Out of nowhere the exploitation of shale oil and shale gas through a process called hydraulic fracturing, 'fracking' for short has turned the United States into the biggest natural gas producer in the world, overtaking Russia," Sally said.

"Shale gas accounts for about 10 percent of the US energy supply - about 25 percent of domestic natural gas supply. But it is not only natural gas, America is fast expanding its crude oil production.

"The forecast is that in about 10 years, the United States will rival Saudi Arabia as a producer of crude oil. Now much of this comes from a new process called tight oil, exploiting oil from previously unproductive sources."

In contrast, fracking has been banned in Europe with police power. Last week Britain took the first steps in what could be lifting of state controls preventing fracking.

The US is already estimated to have reduced oil imports by 175 billion US dollars a year by new technology.

Unlike Mercantilist style renewable energy firms which grab taxes collected from the people with police power via subsidies, 'capitalist' petroleum firms pay taxes to the state. Taxes also make what would otherwise be cheap petroleum based energy much more expensive.

"The numbers are truly astounding," Sally said. "The US is estimated to be getting about 60 billion dollars of additional revenue from royalties from both oil and gas. The forecast is that it will be about 100 billion per annum by 2020.

"Its already created about 1.7 million jobs. The forecast is that it will be about five million jobs by 2020."

China is estimated to have perhaps the biggest shale oil reserves, but it has not developed the technology as oil is a state run business.

Manufacturing and Services

Sally says American manufacturing industry is also going through a revolution, with advanced materials technology and 'smart machines'.

"The third revolution is in services," he said. "The best services companies in the world are American owned, with their headquarters in and their high value added in the US. Apple is an emblematic example."

"I often use the comparison between Apple and Nokia. Why is Apple succeeding? Apple is succeeding because it is no longer a manufacturing company.

"The stuff that we use, like iPods and iPhones and iPads, the production is actually done in China and East Asian supply chains, but the real high value added is what happens before production and after production - basically services - continues to happen in the US."

Sally says Nokia on the other hand has remained a manufacturing company and has not diversified into services and does not have "an ecosystem of apps" around it.

"These two companies are the product of very different home markets," Sally said. "The United States has the most sophisticated services market in the world which has bred Apple and apps.

"The European Union has 27 fragmented services markets. It has still got a stunted services market.

"Behind all this - if you like the common foundation of these three structural transformations - is secure property rights, and despite the interventionism of the American federal government and other governments in the US what is still a much more free-wheeling entrepreneurial culture than other places in the world."

Update II

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READER COMMENT(S)
3. Lefttist Dec 21
Who ever said that, there is no such thing as a free lunch.
2. Viraj Dec 21
Well said seberet, for the past 6 decades govt said to masses ‘you need govt to reduce prices, to gain jobs’ now even govt realize this, but cant get out coz ppl expect it.
1. seberet Dec 21
The importance of private enterprises and free trade are lost among our politicians, policy makers and the general public.

That's why they keep insisting state intervention, state subsidies and the youth of this country yearns for state jobs!