Why This Blind Faith In Government?

I often hear experts proclaim: When markets fail, government should step in.

Why?

When one refers to “government,” they obviously mean politicians and bureaucrats who are the decision makers in government. So, here is a Talisman: replace ‘government’ with ‘politicians and bureaucrats.’

Let’s try it: When markets fail, politicians and bureaucrats should step in.

It doesn’t have the same ring of righteousness, does it? Why do these people think that politicians and bureaucrats can do a better job?

Since 2008, the so-called Great Recession has been the most prominent example of “market failure.” Government proponents declared greedy Wall Street as the responsible party.

When economy is vibrant, the credit goes to the wise, all-knowing government. When economy slumps, of course it is the fault of those greedy capitalists.

Let’s take stock of some of the numerous, omniscient government and quasi-government agencies that were supposed to have tamed the “irrational exuberance” and “animal spirits” of those greedy capitalists: DoJ, SEC, HUD, the Fed, CFTC, FDIC, FINRA. As Milton Friedman often joked, as the number of government agencies grows so does the number of alphabets in the acronyms! To help them with their policing, they are equipped with hundreds of thousands of pages of rules.

So, what do you mean government should step in? Government already stepped in it (pun intended)!

Of course government failed, says Elizabeth Warren, the enthusiastic champion-in-chief of the common man. Her solution? Another government agency – Consumer Financial Protection Bureau (CFPB). The Dodd-Frank Act created the Financial Stability Oversight Council (FSOC).

Why this blind faith in government?

Apparently, government can be a force for good because, unlike corporations, government does not have to answer to greedy shareholders, is not driven by profit motive, and the officers of government can be voted out for non-performance.

Really? No shareholders? No profit motive? Officers can be voted out? Let’s examines these claims.

Government has 320 million shareholders. We are a greedy bunch too. We have split ourselves into thousands of special interest groups: Farm Lobby, Big Oil, Big Pharma, Big Labor, and the irreproachable, incorruptible Middle Class.

In business school one of my favorite professors taught us that conglomerates (massive companies, such as General Electric, made up of vastly different business units) are highly inefficient and represent a terrible form of business organization. If one were tasked with inventing the most terrible form of conglomerate, you can’t do better than government.

Like any conglomerate, government has a CEO (the President), board of directors (Congress and Senate), chiefs of business units (Cabinet Secretaries), other lower level officers (bureaucrats) and shareholders (all citizens).

In a conglomerate, profitable business units cross-subsidize the loss making units. In government, there is only one profitable business unit – the Treasury Department. The rest are all purely cost centers that only spend money.

Worst yet, shareholders believe profit-making is not an objective of government. In fact, some government champions like Paul Krugman believe government can and should be a loss-making entity in perpetuity (should run deficits forever).

It is indeed true that government, by its very nature, cannot have a profit motive. But does that also translate to officers of the government not having profit motives? Not at all.

Politicians and bureaucrats are no different from officers of a business corporation. Almost every politician and bureaucrat who has worked in government for a long time has made a decent fortune for himself. Most of the long-term members of Congress and senators belong to the infamous “one percent.”

Ex-politicians and bureaucrats command hundreds of thousands of dollars in fees for speeches and “consulting.” Many politicians and bureaucrats use the “revolving door” to move freely between private businesses and government. Few people realize that members of Congress and the Senate, and their aides, are exempt from rules of insider trading.

Thomas Sowell, a renowned conservative economist, frequently recalls his experiences from the days he worked in the Department of Labor. Sowell was enthusiastic about finding out the positive impact that Labor’s welfare policies were having on poor sections of the society. His bosses, the politicians and bureaucrats, wanted no part of it. Who cares about social impact? I just want to make sure my department’s budget keeps growing every year.

For the life of me, I do not understand why people believe politicians and bureaucrats are so much different from capitalists. In Milton Friedman’s words, “who are these angels” who we believe are dying to organize our society?

Why should I trust Nancy Peloci, Harry Reid, Paul Ryan, Alan Greenspan, Kathleen Sebelius, Donald Rumsfield, Rod Blagojevich, Hillary Clinton, and Elizabeth Warren over Tim Cook, Mary Barra, Warren Buffet, Carl Icahn, Jeffrey Immelt, Bernie Madoff, John Stumpf, Mitt Romney, and Bill Gates?

The approval rating of government has been dismally low for the better part of the last decade. Yet, nearly 85 percent of members of Congress get re-elected. Talk about getting voted out for non-performance!

Facts clearly show that, similar to private corporations, government has to answer to greedy shareholders, government officers absolutely have profit-motives, and government executives cannot be easily voted out for non-performance.

So, I ask again, why this blind faith in government?

An often offered excuse is that the greedy capitalists corrupt the government machinery and prevent it from doing its job. There is a fancy sounding name for that – cognitive capture.

In his book The Price of Inequality, Nobel Laureate Joseph Stiglitz admits that bad government policies are the primary drivers of income and wealth inequality in the United States. He blames cognitive capture for bad government policies…but then, inexplicably, he proposes more government regulations as the solution.

On one hand, government proponents say government can be a force for good, and on the other hand they say it cannot because greedy capitalists will not let it be.

Well, which one is it?

The Elizabeth Warrens and Bernie Sanders’ of this world believe government can be an effective watchdog if it adapts quickly to the changing world. Adapt is a code word for adding layers on top of layers of bureaucracy.

In the documentary Freakonomics, Steven Levitt and Stephen Dubner show that even a toddler can figure out a way around incentives. Businesses are smarter and nimbler than government and can adapt quickly to new regulations. No sooner are the rules in place than plans to beat them are underway. In fact, as the rules are being written, lobbyists work hard to shape them to their liking.

The end result is a never ending cycle of increased regulations that govern every aspect of citizens’ lives, also known as Communism! Take the example of Obamacare, which dictates that every citizen should buy health insurance and also specifies what level of health insurance they should buy. We are being told that the next logical step is government-run health insurance, or politician-and-bureaucrat-run health insurance.

Government proponents say it is crazy to think markets are capable of self-regulation and that is why we need government regulations. Inherent to that argument is the assumption that government is not part of “markets.” But government regulations have an enormous impact on how markets function and yet they have repeatedly failed to arrest economic recessions and crises. The truth is it is crazy to think any institution is capable of regulating the markets.

Businesses are born, businesses grow, and businesses fail every day. Inefficient businesses eventually go out of business in a free market; that is, if government doesn’t bail them out. Government is the ultimate too-big-to-fail corporation because government champions keep bailing it out via new taxes.

So-called market failures are actually human failures. They remind us that we humans are flawed and so are the systems we invent including government. It is futile to go on a utopian search of that mirage called Smart Government.

Government is a system built by humans. It is not a superhuman institution. Any economic system that humans invent will inevitably go through boom and bust cycles. It’s not failure, it’s human. Regulations are counterproductive because they give a false sense of security giving rise to bigger bubbles. Booms and busts will only become bigger as we make government bigger.

The mantra is: Minimize government, maximize free markets and let it play out.

As Milton Friedman often said Nirvana is not for this world. But free market system will get us closer to Nirvana than any other system of economic organization.

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  • Mark

    I’d suggest you go read a little bit about public goods theory, so that if you choose to critique the concept of market failure you can offer the appearance of knowing what the expression market failure means. It certainly requires no blind faith in anything or anyone.

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