Wednesday, May 20, 2009

Politicians Can Only Make Political Decisions, Not Economic Ones

I once watched a worker that was trying to insert a screw through two pieces of sheet metal. He aligned the pre-drilled holes and then started the screw with his fingers. At that point he looked around for a tool to finish the job and discovered that the only tool within reach was a hammer. He picked up the hammer and gave the screw a whack, driving it into place. Days later the screw fell out, causing the sheets of metal to vibrate against each other during normal operation of the equipment.

There is a proper tool for every job. Use of the wrong tool often produces substandard results. Sometimes it is necessary to make do with what you have. That’s called innovation. But regularly using the wrong tool when the right tool is available is just plain stupid.

One of the basic tenets of classical liberalism is to regard government as a tool to be used only where it is most appropriate; the chief role of government being to safeguard and expand liberty. Many people (from all over the political spectrum) view government as a big stick to be employed in forcing others to conform to their particular view of good.

In this light, John Steele Gordon writes here about why government is the wrong tool for running a business. Steele admits that “Capitalism isn’t perfect.” But he argues that it’s a better than government for running a business. He says that the reasons this is so include:
  • Governments are run by politicians, not businessmen.
  • Politicians need headlines.
  • Governments use other people's money.
  • Government does not tolerate competition.
  • Government enterprises are almost always monopolies and thus do not face competition at all.
  • Successful corporations are run by benevolent despots.
  • Government is regulated by government.
Gordon’s article includes some classic statements. He poses the maxim, “Politicians can only make political decisions, not economic ones.” That singular statement ought to be relentlessly pounded into students in every civics and economics course in the nation. It ought to run in a banner across the TV screen anytime a broadcast features any politician or anyone discussing political proposals.

Describing the Social Security system, Gordon writes:
“It is government's job to make and enforce the rules that allow a civilized society to flourish. But it has a dismal record of regulating itself. Imagine, for instance, if a corporation, seeking to make its bottom line look better, transferred employee contributions from the company pension fund to its own accounts, replaced the money with general obligation corporate bonds, and called the money it expropriated income. We all know what would happen: The company accountants would refuse to certify the books and management would likely -- and rightly -- end up in jail.”
Well, the company accountants might refuse to certify the books. Or the company could be run like Enron. Problems occur when investors are prohibited from taking their money elsewhere, as apparently was the case with many Enron employees. Another good point:
“Cost cutting is alien to the culture of all bureaucracies. Indeed, when cost cutting is inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.”
It is worth reading the article to see Gordon’s discussion of governments using other people’s money and how the taxpayer is shunted aside in negotiations regarding government spending. You can say that the taxpayers get their say at the ballot box and that businesses also use other people’s money through equity and debt, but these are vastly different things.

Politicians know that they are only marginally accountable to taxpayers and that they can manipulate the system to shut down most backlashes that might result from government spending. Groups lobbying for benefits know this too. When businesses use debt, they are subject to the articles of the contract. The parties to the debt have entered into the contract willingly (except in cases where government is pumping cash into businesses). If equity holders are unhappy with a company, they can often dump their shares within minutes and take their money elsewhere. Try doing that as a taxpayer.

Gordon describes how gross inefficiency is the default behavior when government tries to run a business. The GAO recently found that “no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent.” This kind of thing is typical in a government run business.

It is true that private enterprise has its share of inefficiencies and problems. But it is unquestionably the best tool for running businesses. Government’s role is to ensure a level playing field and to prevent businesses from stifling competition. When government steps in to prop up failing businesses, it works directly counter to its appropriate mandate. When government runs business itself, it is like using a hammer where a screwdriver would be appropriate. Or maybe it’s a hammer and a sickle.


Jason The said...

One of the biggest holes in the argument you're buying into here (and also made clear in your own words in the last paragraph) is the apparent lack of recognition that our economy is a financial, not manufacturing, system now, and without banks lending (or being "propped up" as you and the author conveniently repeat) it folds.

There is plenty of room for criticism of the first, and subsequent bank bailouts and the dynamics of the TARP legislation (i.e. poor oversight, no teeth to force banks to lend the funds rather than invest it in other failing banks... and guess which party opposed such measures being included?) but whenever a person supposes that "letting the banks fail" was an intelligent option, they display only two things:

1. Ideology
2. Complete lack of understanding regarding the nuances of what makes our economy tick.

Neither of those options is a model that works in keeping a balanced, healthy economic system ticking.

Rhetoric is fun, and ideology itself can be reassuring. But in some situations, it requires to strong a penchant for willing suspension of disbelief to be a solution. That's what I read here.

Scott Hinrichs said...

We will never know for sure what would have happened with the "meltdown" had the shoddy performers been allowed to fail or spin off their unprofitable units. But there are plenty -- um, not in the businesses infused with manufactured taxpayer cash but in competing banks that had been better managed -- that claim that the Paulson-Bernanke-Geithner bailouts were much less than necessary. You seem to have bought into the establishment claim that only the powerful elite could save the financial system from collapsing and that the unwashed masses are lucky to have such eminents.

While credit is absolutely necessary for our economy to function well, an even more fundamental feature is the need for constructive destruction. Many -- perhaps most -- feel that the short-circuiting of this process in the recent financial crisis is just what the doctor ordered. Others feel that a greater price will yet be paid for such meddling. Time will tell.

Bradley Ross said...

Jason, I'm no economist so perhaps there is something I'm missing here. It seems obvious the the failure of financial institutions would have been rough on the country. It isn't obvious to me that allowing such "creative destruction" would be a bad thing in the long run. You've said that failing to see this belief demonstrates a "complete lack of understanding of the nuances of what makes our economy tick."

Would you mind elaborating on those nuances?

Jeremy said...

If the banks failed on a massive level, we would be in a great depression situation right now, not a slightly worse than the early 80s situation. The economy depends on money flowing in a somewhat predictable manageable way. Sudden collapses of the financial system make it much, much, much harder to dig ourselves out of the hole.