There is a strand in what passes for policy discussion which goes like this:
(i) There is an acknowledged problem in some sector or policy area;
(ii) the Government could do something to ameliorate this problem;
(iii) QED the Government should do something, not always specified.
The result of this line of attack is policies like the Car Scrappage Scheme, of which more anon.
Examples in this morning’s media concern the excess supply of hotels, and the threat of global warming. The Government is being urged to take measures
– to reduce the hotel stock, and
– to support the hydro storage/windpower project called Spirit of Ireland.
Hotel Stock: Hotels are a pure private good. Due to policy-induced capacity expansion, there are now too many. Some are bust, and face receivership/liquidation/NAMA. Room prices are falling. This is the natural market response. Where is the market failure?
It is true that some long-established hotels have seen their business undermined by State-subsidised competition, but this is a routine business risk in an interventionist political culture. Many of these long-established hotels enjoyed State grants for conference/leisure centres when the going was good. The industry is lobbying for some State-run scheme to take out capacity. Doing nothing will cost less and the industry will adjust. Intervening, yet again, will distort adjustment.
Spirit of Ireland: The externality of carbon emissions is addressed by putting a price on carbon, at which point the State can safely adopt a position of technology neutrality. Power generation, once externalities are dealt with, is a pure private good too. Whether these schemes make sense is a matter for the capital market, not for the Government.
Car Scrappage: Car sales have collapsed and some car dealers have gone out of business. The same has happened with €1,000 handbags, and some handbag retailers are struggling. Ireland manufactures neither cars nor handbags. The Car Scrappage Scheme will spend taxpayer money to sustain, temporarily, the retail distribution network for an imported consumer durable. Why not a Handbag Scrappage Scheme? This scheme is plain daft for Ireland. It is not even clear that it makes any sense for car-producing countries – the German scheme appears to have sucked in imports of smaller cars, which Germany does not produce.
These ‘Something Must be Done’ schemes provide harmless entertainment for economists, fodder for the 24-hour news cycle and a playpen for lobbyists. But they contribute nothing to sustainable employment, cost the Exchequer money and hinder the necessary post-Bubble adjustment.
In contrast, the Economics of Doing Nothing is that this is often the best policy, and the cheapest.