PRESTOPUNDIT

This almost too stupid to be believed. The U.S. government is burning millions in cash to create make-work jobs in Iraqi government owned companies which, as a result, are operating completely outside the market system of profit and loss price signals. The boneheads in the U.S. government seem to be intentionally generating the classic knowledge problem of socialist calculation -- the worst disaster which can possibly befall any economy or enterprise. If you want real growth and real economic advance, the thing you need most are genuine prices and genuine profit and loss signals. Economic growth and coordination are impossible without these. Quotable:

The state-owned shoe factory here was once sophisticated enough to make shoes for Bally, the Swiss luxury goods company.

But that was 20 years ago, before wars and sanctions, before Saddam Hussein's army became the factory's biggest customer. Now, with Mr. Hussein and most of his army gone, production has plunged to 1,800 pairs of shoes a day from 5,000 at the start of the year, according to Riadh Hassan Ali, the company's design manager. There are scarcely any customers.

Six months after President Bush declared major military operations in Iraq over, the economy here is largely in stasis, propped up by American cash but showing little progress. The privatization of Iraq's decrepit state-owned industries like the shoe factory, is on hold ..

The shoe factory illustrates just how much ground the country must make up. The state-owned company that runs the factory employs 3,000 people around Iraq to make shoes, as well as a few other leather goods.

Plant No. 7, where the company makes men's dress shoes, is clean and cheery. Under high ceilings, men stamp out pieces from shiny leather hides, while women stitch together shoe tops at sewing machines. With the scattering of the army and the police, a search for new clients has begun.

With the collapse of Mr. Hussein's rule, Iraq no longer subsidizes imports of leather hides, a subsidy that the company passed along to its customers. "Because we bought it very cheap from the government, we sell it very cheap to the citizens," said Mr. Ali, the design manager. "The profit was controlled."

Now, however, the company must buy its hides on the open market, and pass those increased costs along to customers. So prices have risen, and sales have dropped, Mr. Ali said.

But the company has not had to fire anyone, because the United States does not want to put more unemployed Iraqis on the streets and risk worsening the security crisis. So the occupying authorities are paying the salaries of all 3,000 workers, even if they have nothing to do.

In this, the shoe company is no different from any of Iraq's 53 state-owned companies, whose workers are all still being paid by the occupation, at a cost of several million dollars each month. The cost is small compared with the others the occupation is incurring, but the payments show that for now, security considerations have topped the United States' hope of making the state-owned companies more efficient.

With wages subsidized but the shoe company forbidden to fire anyone, estimating profit or loss is impossible, much less planning long-term investments in new equipment, said Ali Hadi, a manager. "We can't calculate these things now," he said. "When next year comes, we will calculate next year."

(via Mises Econ Blog)