Wednesday, June 24, 2009

Government+Running a Business=Fail

Here is a great article from the Wall Street Journal, May 21, 2009:

Why Government Can't Run a Business


The Obama administration is bent on becoming a major player in -- if not taking over entirely -- America's health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government's track record in running economic enterprises. It is terrible.

In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.

When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.

Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.

These examples are not aberrations; they are typical of how governments run enterprises. There are a number of reasons why this is inherently so. Among them are:

1) Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen. The gathering disaster of Social Security has been obvious for years, but politics has prevented needed reforms.

And politicians tend to favor parochial interests over sound economic sense. Consider a thought experiment. There is a national widget crisis and Sen. Wiley Snoot is chairman of the Senate Widget Committee. There are two technologies that are possible solutions to the problem, with Technology A widely thought to be the more promising of the two. But the company that has been developing Technology B is headquartered in Sen. Snoot's state and employs 40,000 workers there. Which technology is Sen. Snoot going to use his vast legislative influence to push?

2) Politicians need headlines. And this means they have a deep need to do something ("Sen. Snoot Moves on Widget Crisis!"), even when doing nothing would be the better option. Markets will always deal efficiently with gluts and shortages, but letting the market work doesn't produce favorable headlines and, indeed, often produces the opposite ("Sen. Snoot Fails to Move on Widget Crisis!").

3) Governments use other people's money. Corporations play with their own money. They are wealth-creating machines in which various people (investors, managers and labor) come together under a defined set of rules in hopes of creating more wealth collectively than they can create separately.

So a labor negotiation in a corporation is a negotiation over how to divide the wealth that is created between stockholders and workers. Each side knows that if they drive too hard a bargain they risk killing the goose that lays golden eggs for both sides. Just ask General Motors and the United Auto Workers.

But when, say, a school board sits down to negotiate with a teachers union or decide how many administrators are needed, the goose is the taxpayer. That's why public-service employees now often have much more generous benefits than their private-sector counterparts. And that's why the New York City public school system had an administrator-to-student ratio 10 times as high as the city's Catholic school system, at least until Mayor Michael Bloomberg (a more than competent businessman before he entered politics) took charge of the system.

4) Government does not tolerate competition. The Obama administration is talking about creating a "public option" that would compete in the health-insurance marketplace with profit-seeking companies. But has a government entity ever competed successfully on a level playing field with private companies? I don't know of one.

5) Government enterprises are almost always monopolies and thus do not face competition at all. But competition is exactly what makes capitalism so successful an economic system. The lack of it has always doomed socialist economies.

When the federal government nationalized the phone system in 1917, justifying it as a wartime measure that would lower costs, it turned it over to the Post Office to run. (The process was called "postalization," a word that should send shivers down the back of any believer in free markets.) But despite the promise of lower prices, practically the first thing the Post Office did when it took over was . . . raise prices.

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.

6) Successful corporations are run by benevolent despots. The CEO of a corporation has the power to manage effectively. He decides company policy, organizes the corporate structure, and allocates resources pretty much as he thinks best. The board of directors ordinarily does nothing more than ratify his moves (or, of course, fire him). This allows a company to act quickly when needed.

But American government was designed by the Founding Fathers to be inefficient, and inefficient it most certainly is. The president is the government's CEO, but except for trivial matters he can't do anything without the permission of two separate, very large committees (the House and Senate) whose members have their own political agendas. Government always has many cooks, which is why the government's broth is so often spoiled.

7) Government is regulated by government. When "postalization" of the nation's phone system appeared imminent in 1917, Theodore Vail, the president of AT&T, admitted that his company was, effectively, a monopoly. But he noted that "all monopolies should be regulated. Government ownership would be an unregulated monopoly."

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.

But that is exactly what the federal government (which, unlike corporations, decides how to keep its own books) does with Social Security. In the late 1990s, the government was running what it -- and a largely unquestioning Washington press corps -- called budget "surpluses." But the national debt still increased in every single one of those years because the government was borrowing money to create the "surpluses."

Capitalism isn't perfect. Indeed, to paraphrase Winston Churchill's famous description of democracy, it's the worst economic system except for all the others. But the inescapable fact is that only the profit motive and competition keep enterprises lean, efficient, innovative and customer-oriented.

Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).

Wednesday, June 17, 2009

Stealth Tactics

A lot of us conservatives are terrified over the way this health care "reform" pushed by the Obama administration is shaping up. The stated goal is a public health insurance "alternative" that will compete with the private sector, offering people alternatives to their current health insurance plans, and that the government has no intentions of completely taking over the health care industry (20% of our economy).

Sure. And I'm a leprechaun. The administration is using stealth techniques to take over the health care industry.

First, I see a huge disconnect between the stated problem and the offered solution. The problem is high costs of insurance and health care in general, yet the stated solution is a government health insurance program. Switching who pays for health care doesn't fix the problem...just who pays for it...and if the government is paying for it, YOU are paying for it as a taxpayer. Perhaps we should work more on decreasing the costs of health care rather than switching payers. Malpractice suits could be a place to start. I talked to a nurse here in Brookings who said her son was a doctor out in California. He QUIT delivering babies, because the malpractice insurance he had to purchase was simply too high...and he was paying $125,000! That's just for insurance to be a doctor! Our legal system needs reform to fix a lot of problems (although it may be tough with a Democrat-controlled Congress, as lawyers are the top contributors to that party).

The most disturbing thing about the administration's proposal is how Obama says that the government's new insurance plan will simply compete with private industry plans, as if that will somehow not be nationalized health care. In the end it will end up being just the government providing insurance, and I'll explain why through basic economics:

People often complain when a major chain store comes to town (like Walmart, Perkins, etc.). The biggest issue people have (although misguided, as I'll show), is that businesses that come in sell their goods very cheap, below cost, in order to push competition out of business in that area. The idea is that once competition is out of business, these bigger companies can then raise their prices to a higher level than before. This is a process referred to as "predatory pricing."

You with me?

The problem is, this rarely ever works, because it's not in the bigger company's long-run interests. Once they raise their prices again, competitors will once again move in to fill niches to compete with the bigger business, so once again they will have to sell their goods below cost to try and push competition out. Companies have to maintain profits, so chronically selling below cost simply to force out competition doesn't really pay, in that selling goods below cost for too long hurts the bigger store too much, and it's a losing battle anyway as smaller businesses return once prices go back up.

What does all this have to do with health care?

Enter the government. People like to hate Walmart and big business when they practice predatory pricing? The government is the ULTIMATE predatory pricer. The one thing that kept private sector, bigger businesses from predatory pricing was that in the long run, they have to eventually switch this process around and turn a profit, and turn consistent profits. When the government is "competing," with the private sector, they never have to worry about profits. Amtrak has turned a loss since 1970 and exists as a passenger railroad monopoly, even though it can't turn a profit. The government can keep operating things below cost for as long as it likes, through government subsidies (YOUR tax dollars thrown at it to keep it going)...eliminating private business competition and creating a government monopoly. Government does not have the private sector requirement of a profit to keep going, so it can unfairly undermine private business, even if they are hugely unprofitable, inefficient, and provide crappy services.

This is what will happen with the health care industry. Government will force all other insurance programs out of business simply because it can operate at a loss for so long.

Obama will not come outright and say this...preferring to stealthily take over the health insurance industry through these more subtle means--techniques that make me a little nervous and seem a bit Soviet Unionish.

If you want to take over the insurance industry, why not come out and say it? Because people might have a problem with that...and that doesn't get your party votes, does it now?

Wednesday, June 10, 2009

Man or Immortal?

Am I the only one that gets just a little nervous when our supposedly "objective, watchdog-role media" starts talking like this?

Saturday, June 6, 2009

D-Day, From Presidents Past and Present

Thank you veterans for all you have sacrificed in preserving our freedom and liberty.

From President Obama, at the 65th anniversary of D-Day:

I was lucky enough to visit this cemetery in 2005, where we laid a wreath in memorial of D-Day:

From President Reagan, on the 40th anniversary of D-Day:

"There is a profound moral difference between the use of force for liberation, and use of force for conquest."

Monday, June 1, 2009

How to Catch a Wild Pig

From an email I received:

A chemistry professor in a large college had some exchange students in the class. One day while the class was in the lab the Professor noticed one young man (an exchange student) who kept rubbing his back, and stretching as if his back hurt. The professor asked the young man what was the matter. The student told him he had a bullet lodged in his back. He had been shot while fighting communists in his native country who were trying to overthrow his country's government and install a new communist government.

In the midst of his story he looked at the professor and asked a strange question. He asked, 'Do you know how to catch wild pigs?' The professor thought it was a joke and asked for the punch line. The young man said this was no joke. 'You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come everyday to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again and you put up another side of the fence. They get used to that and start to eat again. You continue until you have all four sides of the fence up with a gate in The last side. The pigs, who are used to the free corn, start to come through the gate to eat, you slam the gate on them and catch the whole herd. Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught. Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.

The young man then told the professor that is exactly what he sees happening to America . The government keeps pushing us toward socialism and keeps spreading the free corn out in the form of programs such as supplemental income, tax credit for unearned income, tobacco subsidies, dairy subsidies, payments not to plant crops (CRP), welfare, medicine, drugs, etc. while we continually lose our freedoms--just a little at a time. One should always remember: There is no such thing as a free lunch and a politician will never provide a service for you cheaper than you can do it yourself.