The Good, the Bad and the Plain Crazy
The EU Commissariat has just made an announcement that is both good and bad. Let us start with the good: According to European press reports, Chief Commissar Barroso left the commission with an inheritance of 452 legislative initiatives, including the “harmonization of standards of maternity protection”, “uniform energy taxation and environmental protection legislation” and “forcing all nations to implement waste recycling” (if you want to know why waste recycling, which superficially sounds like a great idea, is yet another complete etatiste charade, read this article in which Per Bylund deconstructs the recycling myth using socialist paradise Sweden as an example).
Anyway, the new commissariat under JC Juncker has decided to simply strike 83 of Barroso’s initiatives legacy completely, put a large part of it on hold, and instead concentrate only on a handful – 23 to start with. Also, among the things to be tackled is an endeavor to actually cut red tape (we will believe it when we see it). According to the commissariats own words:
“When laws are no longer fit for purpose, or impose too much burden, they will be reviewed and amended to make EU law lighter, simpler and less costly.”
So much for the “good”.
However, it is very unfortunate that many of the remaining initiatives they have decided to concentrate on (the bad) mainly consist of bureaucratic nonsense of the finest. Among the top initiatives we find for example: The “€315 billion investment offensive”, an “ambitious digital single market package” (under the leadership of the economically and technologically illiterate digital commissar Mr. Öttinger, whom we have profiled before), and “fair taxation” (the term “fair” in conjunction with the term taxation always means only one thing: higher taxes).
We want to once again focus on the bizarre “investment initiative” on this occasion. This project is one we would term both “bad” and “plain crazy”, although the political cronies who stand to be enriched by it would of course disagree.
The “ghost airport” at Lodz
Photo credit: Reuters
Modern-Day Bridges to Nowhere
For one thing, the EU doesn’t have the money for the “investment initiative”. As Mish has pointed out, the plan is to employ leverage, and one of the enticements offered to private sector participants are “EU guarantees against first losses”. Heads you win, tails we lose. The “we” in this sentence are the EU’s tax cows, who will be paying through the nose for the losses to come.
Why are we so certain that there will be losses? For one thing, the very fact that without the intervention of the politico-bureaucratic apparatus and its carrot of “loss guarantees” no-one would even think of undertaking any of these investment projects proves ipso facto that they are not economically viable. If they were, there would be no need to subsidize them: the private sector would undertake them voluntarily.
Moreover, there is no way for the apparatchiks to ascertain the opportunity cost associated with these projects. They are faced with a variant of the socialist calculation problem. It is a “variant”, because they can actually look at market prices in what is left of the market economy. They are not completely deprived of a basis for economic calculation.
However, since there is no profit motive involved on their part, the question whether the economic resources that will have to be diverted to their projects could not have been used to satisfy more urgent consumer wants will remain unanswered. In fact, it is a virtual certainty that this diversion of resources will result in intra-temporal resource misallocation (we are differentiating here between the inter-temporal misallocation of capital due to monetary pumping and interest rate suppression, and the intra-temporal variety through government spending and subsidization of economically non-viable projects). It is important to realize that the end result will be a production structure out of line with actual consumer wishes and demands, regardless of the precise type of malinvestment that occurs.
For those who want to see some empirical examples that buttress the above contentions, we can offer a glimpse of past EU subsidized investment projects, in this case the example of Poland’s “ghost airports”. Ghost airports are the modern-day equivalent of “bridges to nowhere”, resp. Keynesian pyramid building.
“The European Union has given Poland more than 100 million euros ($125 million) to build at least three “ghost” airports in places where there are not enough passengers to keep them in business. The result is gleaming new airport terminals which, even at the peak of the holiday season, echo to the sound of empty concourses and spend millions trying to attract airlines.
Poland is not the only country in Europe to have built airports that struggle to attract flights. Around 80 airports in Europe attract fewer than 1 million passengers a year, and about three-quarters of those are in the red, according to industry body Airports Council International. Some cost much more to build than the Polish projects. One airport in eastern Spain, open for three years, has so far received not a single flight.
But Poland is striking because the country received so much money for its projects from EU funds.
Poland received 615.7 million euros in EU support for airports between 2007 and 2013, according to figures supplied to Reuters by the European Commission. That was almost twice as much as the next biggest recipient, Spain, and more than a third of all member states’ money for airports. The government declined to provide all the information on which it based its decisions to invest in the airports, but Reuters has reviewed data on three sites where traffic fell dramatically short of forecasts.
Poland is often touted by Brussels as one of the most efficient users of EU aid, and there is no suggestion the country used EU airport money corruptly. European help has been vital in improving Poland’s aviation infrastructure, only a small share of the country’s airport spending has been on white elephants, and passenger shortfalls may have been exacerbated by the 2008 global financial crisis. Spokespeople at some airports said the projects could be considered a success because they were creating jobs, bringing in tourists, and driving investment in the regional economy.
But it is clear mistakes were made in Poland, planning officials and aviation executives say. The whole experience raises questions about how the government will handle the next big injection of EU money, which it expects to be 82 billion euros over the next seven years.
The problem is most striking at the recently rebuilt Lodz passenger terminal, where passenger numbers in 2013 fell almost one million short of forecasts, according to European Commission documents examined by Reuters.
On a relatively busy day this summer, just four flights arrived and four departed. In between, the place was almost deserted. In the early afternoon a single passenger, a woman in a blue-and-white striped T-shirt, sat in a 72-seat waiting area. Outside on the tarmac, five sets of movable steps stood waiting for a jet to land.
Where there aren’t enough passengers to make an airport viable, local governments keep them on life support through subsidies, according to a report by CEE Bankwatch Network, a non-governmental watchdog. The beneficiaries have often been the airlines that use them.”
Almost needless to say, the contention by “some (unnamed) spokespersons” that “the projects could be considered a success because they were creating jobs, bringing in tourists, and driving investment in the regional economy” is a prime example of the “broken window fallacy”. It fails to consider that the funds could have been used for something else, namely a project that actually does make commercial sense.
The Reuters report stresses that there is no suggestion that “corruption was involved”, and one doesn’t need to assume that there was corruption in order to prove the point – which is mainly that these are examples of large-scale capital malinvestment, involuntarily funded by EU tax payers. We would however note that corruption is nowhere more likely than in such state-funded projects – the example of the EU funded Italian road in Calabria (scroll down to “Ndrangetha sponsored by EU subsidies”) that remains forever unfinished and is lining the pockets of the mafia is a glaring example.
Lodz airport baggage claim area on a typical day.
Photo credit: Reuters
Another important detail is the “cui bono” question. Thus we read that these useless ghost airports continue to require subsidies, lest they would have to be closed down, as they keep losing money every day. And who are the beneficiaries? The airlines that use them – or we should perhaps better say: the airlines that don’t use them.
Poland’s ghost airports should be seen as a clear warning that a massive bout of malinvestment is about to be perpetrated if the EU really pushes through its €315 billion state-funded “infrastructure investment” boondoggle. However, even if we didn’t have such empirical examples at our disposal, economic theory clearly suggests that such undertakings will end up as a giant waste of scarce resources. Can Europe really afford such a waste of scarce capital at this juncture?
Instead of throwing money at the wall in the hope that some of it will stick, EU governments should endeavor to restore free market principles in Europe, by cutting down on regulations and lowering taxes. That would promise to be productive.
A rare airplane landing in Lodz – and it’s a pretty small aircraft.
Photo credit: Reuters
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- A Date Which Will Live in Infamy
President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.” Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard. Nixon points out where numerous evil speculators were suspected to be...
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- News from TINA Land
Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Silver is in a Different World
The Lighthouse Problem Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams. Who put that bobbing lighthouse there? Image credit: John Lund / Corbis Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat,...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...
- Real vs. Nominal Interest Rates
Calculation Problem What is the real interest rate? It is the nominal rate minus the inflation rate. This is a problematic idea. Let’s drill deeper into what they mean by inflation. What to include, and how can it even be added up? Illustration by alekup You can’t add apples and oranges, or so the old expression claims. However, economists insist that you can average the prices of apples, oranges, oil, rent, and a ski trip at St. Moritz. This is despite...