Forget the banks, forget the car makers. The biggest bail-out story of last week – or the most entertaining, at least – has to be the news that Italy will spend €50m buying up 200,000 rolls of cheese. The cheese will be given ‘to the needy’, which I’m sure the needy are very happy to hear. But this isn’t about helping the poor – it’s about propping up northern Italy’s cheese-making industry. The problem the cheese makers face is clear: there are too many of them. There are more than 400 makers of Parmigiano Reggano around the city of Parma. The cheese costs more to make than they can sell it for.
But rather than let a few manufacturers go to the wall, or at least join forces to cut production costs, the Italian government would rather subsidise their way of life. Now, maybe Italian taxpayers don’t mind being forced to pay to keep someone else’s family business open. But this is more than just a burden on the taxpayer. It gives the subsidised firms an unfair advantage – for example, the makers of Buffalo Mozzarella (sales of which have been hit by Naples’ refuse problems) aren’t included in the bail-out, and are now complaining bitterly.
We could dismiss all this as Italy just being, well, Italy. But government intervention is all the rage these days – even in the home of capitalism. The Federal Reserve this week cut interest rates as low as they can go. In fact, the US central bank’s key rate has been effectively zero for a while now, so the move was little more than symbolic. But anyone who had any doubts before now knows that the Fed “will print money to an unlimited extent until it starts to see the economy expanding”, as former St Louis Fed president William Poole put it. The Fed’s already bought mortgage bonds to drive the interest rate on mortgages lower. It may buy US Treasuries in the New Year, to cut long-term interest rates, and “stands ready to extend credit to small businesses and households”, reports The Daily Telegraph.
But how will the Fed choose who deserves support? The problem is that the credit bubble of recent years has left America with too many businesses providing services the country no longer needs. Does America need more houses? No. More shops? No. More cars? No. What it really needs is more savings; that means some of these firms have to go to the wall as consumers cut back. Throwing more money at the problem won’t make it go away – it could well make it worse. After all, when the Italian government stops buying cheese, there will still be too many cheesemakers. And Japan’s six years of zero-interest rates didn’t stop the economy from falling into recession this year. If the Fed gets in the way of the ‘creative destruction’ process, it may be a very long time indeed before the American economy can come off life support.