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May 05, 2009

Central Planning is Back in Vogue
by Steve Saville

Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 3rd May 2009.

At the root of central planning ideology is the belief that a group of well-meaning government officials and/or experts is more capable than the unrestrained free market of allocating resources for the betterment of society. However, whenever and wherever central planning of the economy has been attempted it has always been a failure, with the magnitude of the failure generally being proportional to the breadth of the central planning experiment (small-scale attempts to centrally plan have tended to create relatively minor problems whereas efforts to centrally plan the majority of economic activity have led to total disaster). It always fails because the market process is so complex, and yet so smooth, that any attempt by the government to control it will 'throw a spanner into the works'. But unfortunately, each new generation seems to operate under the assumption that the only reason central planning has never worked in the past is because the right people haven't been in charge.

Powerful (we say irrefutable) arguments can be made against central planning on both theoretical and empirical grounds, but we must invest based on the way things are as opposed to the way they should be; and right now there is a very strong trend towards increased government control of economic activity. We would rather not delve into politics when writing these commentaries, but we no longer have any choice in the matter because politics is coming to totally dominate the financial markets and the investing landscape.

Ironically, one of the primary drivers of today's relentless shift towards greater government control of the economy is the set of problems caused by governments' earlier attempts to control the economy. As Ludwig von Mises observed many decades ago, government intervention in the economy inevitably creates problems that provide the justification for more intervention. It helps, of course, that when government intervention leads to a crisis the finger of blame is invariably pointed at the free market, a mistake made possible by the fact that most people, including most economists, fail to understand that neither the 'cartelised' banking system of today nor the symbiotic relationship that exists between some large private corporations and the government has anything to do with Capitalism.

As has often been the case in the past, the focal point of the current batch of central planners is the energy industry. If you control energy production, energy-related investment and energy consumption then you exert considerable influence over the entire economy, especially if you already have total control over money and banking.

Displaying either a remarkable ignorance of history or a total disregard for the lessons of history, the latest generation of US central planners, led by a charismatic president, have decided to push the US energy industry in the direction that they believe will create the optimum mix of economic growth and clean air (and, of course, gain the most votes). If we are lucky then the havoc they cause will be no greater than the havoc caused by "Project Independence" during the 1970s and 1980s, but chances are we won't be so lucky.

At this point it's worth briefly reviewing the history of "Project Independence", particularly since some aspects of this earlier attempt by the US government to steer the energy industry in a politically desirable direction are similar to current plans.

"Project Independence" was introduced in 1973 by an earlier generation of central planners with the goal of making the US independent of foreign oil by 1980. It had many facets, including the provision of subsidies to synthetic fuel manufacturers, increased oil tariffs, conservation schemes, and increased government spending on mass transit systems. Later in the decade the government also imposed a "Windfall Profits Tax" on oil companies (the more things change...). Ironically -- the word "ironically" is often appropriate when discussing the effects of government intervention -- the various measures implemented by the US government with the aim of creating energy independence actually made America MORE dependent on oil from unstable regions such as the Middle East. They did so because they misdirected energy-related investment and crimped the abilities of US oil companies to increase production.

The US Government's efforts to promote the production of synthetic fuels under the banner of "Project Independence" amount to a classic example of how schemes designed to circumvent the market often pan out. As explained by Thomas DiLorenzo in his book "How Capitalism Saved America":

"In 1979 the federal government created a Synthetic Fuels Corporation...that would make low-interest loan guarantees to companies developing synthetic fuels. As with all government programs, however, the indirect subsidies were distributed according to whichever members of Congress had the most clout and could funnel the subsidies into their home districts or states, not according to whatever firms held the most promise in developing synthetic fuels. In other words, it was a giant political pork barrel.

The government promised to be producing 500,000 barrels of synthetic fuel per day by 1987, but it never supplied more than 10,000 barrels. Moreover, the loan guarantees were limited to those companies that had such poor prospects that they could not obtain private funding. In other words, only the most unprofitable companies qualified.

There is even evidence that the Synfuels Corporation IMPEDED the development of synthetic fuels. Energy industry analyst Milton Copulos explains that "virtually all lending [by investment banks] for alcohol fuel plant construction came to a halt as the banking community waited to see what the federal programs would eventually include." As a result, says Copulos, "construction of alcohol plants came to a virtual halt." Thankfully, the whole program was scrapped in 1986."

Energy independence is still a policy goal, but the main thrust of the US government's current efforts to centrally plan the energy industry is Global Warming (GW). In the hope of arresting the GW trend the Obama Administration has already committed to spending hundreds of billions of dollars, and will probably end up spending trillions of dollars, to promote methods of power generation that emit less carbon. It will also be taking steps to increase the cost of energy sources that are presently far more economical, but are perceived to be less environmentally friendly. These actions will impose huge direct and indirect costs on the US economy even if the Climate Alarmists are right and the global warming trend that began around 1980 was primarily driven by an increase in human-generated carbon emissions. It will impose still greater costs if, as we suspect, the trend was part of a natural cycle that has already run its course. In other words, the unshakable belief in the Global Warming threat is providing the justification for government action that could cripple an economy that is already in a severely weakened state. As an aside, we have singled out the US Government but it should be noted that the governments of most developed-world countries are headed down the same poorly chosen path.

As the government becomes increasingly involved in deciding how resources are allocated, the overall economy and the average standard of living will be losers. Based on the historical tendency for the actual effects of government intervention to be the opposite of the intended effects, the environment will probably also be a loser. There will, however, be winners, and as mentioned earlier in this discussion we must invest based on the way things are as opposed to the way they should be. Amongst the most likely winners are the alternative -- alternative, here, meaning renewable and/or "green" -- energy companies that will benefit directly from the government's largesse and forced redirection of resources. In fact, there is a reasonable chance that "alternative energy" will be one of the next decade's investment bubbles. The uranium industry is also a likely winner because uranium is the only relatively-clean energy source that can be applied on a large scale and that will be economically feasible within the ranks of the world's developing nations.

We aren't offering a free trial subscription at this time, but free samples of our work (excerpts from our regular commentaries) can be viewed at: http://www.speculative-investor.com/new/freesamples.html.

Steve Saville
Hong Kong

Regular financial market forecasts and analyses are provided at our web site: http://www.speculative-investor.com/new/index.html. One-month free trial available.