The Stone City

Words Made to Last

Tuesday, August 22, 2006

Mercantilism in Action

Kevin Drum is once again using GM's pension troubles to argue, not for personal responsibility for retirement, but for a redoubled effort to replicate the same problems on a larger scale. [For an earlier analysis, start here or here.]

Mr. Drum is a true paleoliberal, and a booster of nationalized healthcare and pensions. In two particular cases, he lets his enthusiasm for these projects overcome his reason. He attempts to airbrush the libertarian case out of existence:
So who benefits from this lopsided system? No one except the insurance and financial services industries that administer these plans.
Clearly there are other beneficiaries; for example, the workers at companies like Google [Mr. Drum's example, not mine], who wish to sell their services for a mutually agreed fair price, and are willing to take responsibility for their own savings and retirement.

But the real failure of understanding comes still earlier. Bemoaning the fact that GM's generous pensions have driven up its costs, Mr. Drum says:
GM's management faces higher costs than its competitors in other countries because it has to pay its employees' healthcare costs and Toyota and Volkswagen don't.

Let's walk through this slowly. Enabled by Germany's nationalized pensions and healthcare schemes, Volkswagen AG does not need to bear the full cost of building a car. They can hire more workers, build more cars, and sell them abroad at a nominal profit. But while the corporate sector publishes a profit, the state sector accrues a loss -- and, if the pension and healthcare costs are the competitive difference, it means this loss exceeds the corporation's profit: in short, Germany as a whole is selling cars abroad for less than their cost of manufacture.

Mr. Drum appears to believe that this is a good thing.

[Update 24 August: Alex Whitlock points out in comments that Mr. Drum's premise is probably factually wrong.]