Why Government Doesn't Work

Exhibit A

Say you stumbled upon a lot of money.. say 14 million dollars. What would you do with it? Suppose you want to make a return on your investment, what qualities in the market or in companies would you look for? Would you invest in a company that looked like this: The company is ZBB Energy. They are on the cutting edge or green energy technology manufacturing batteries and equipment to store in energy for cars and wind turbines. Sounds great so far! But, when you look at their filings with the SEC, they have been hemorrhaging money since going public. They lost $4.9 million in fiscal 2008 and $5.5 million in fiscal 2009, also $6.9 million in first 9 months of this year! It explained it had a "cumulative deficit" of $44.1 million and informed shareholders that it "anticipates incurring continuing losses." Its CEO was just asked to step down and has a new 72,000 square foot facility that is operating at 10% capacity.

The 14 million dollar question: would you invest your 14 million into this company?

You would have to be crazy!! But, guess who found it worthy?? The Federal Government. The Obama Administration actually announced the awarding of the money at their plant as a part of the 2.3 B package to promote clean energy calling it "pointing the country to a brighter economic future."

Terrific.

Exhibit B

Often pointed to as a huge success story of the Stimulus package, the Cash for Clunkers program was a case study in itself on why government doesn't work. The program took $3 Billion in taxpayers money and gave tax rebates for people who traded in their old "clunker" car for a newer, more green car. The Central Planners (Fed Government) thought it would be a great way to clean up the environment and stimulate auto sales. But, the effects of planners intervening in a free market to help are far worse than I originally thought. As Reagan once said, "the 9 most terrifying words in the English language is : 'I'm from the government and I am here help."

Here is the auto sales index over the past year. The spike is obviously from the quick and artificial demand. Over 600,000 plus sold and the central planners declared victory! Then, the consequences and details came. Pesky details. Simple arithmetic shows that each transaction cost the taxpayers $24,000. We could have just bought them new cars with the money we devoted to the cascade of government bureaucrats and paperwork to administer this farce. Now, we are entering the real consequences. Edmunds is reporting that used cars are on average 10% more expensive this year than at this point last year and over 30% more expensive for SUVs. Each buyer this summer paid an average of $1,800 more for used vehicles than at this point last year. The problem with "central planning" is that their was a real market for the cars that the Obama administration sent packing. Who looks for used cars?? People on a budget, who cannot afford to buy new. By destroying a quarter’s worth of trade-ins in three weeks and permanently taking them off the market, the Obama administration has forced an artificial inflation by supply restriction.

They subsidized new car sales that would have occurred anyway and in the process, might as well have shredded $3 Billion dollars in our faces. Sound a lot like the homebuyer's credit that the planners love. Ironically, the graph is shockingly similar to the one above. The people most hurt by this act of planning is the working class folks, who could least afford to.

Terrific. At least my air is less dirty.

Exhibit C

This is Medicaid Chief Actuary in 2008 reported these numbers:

Year (pre-PPACA)	2010	2011	2012	2013	2014	2015	2016	2017
Covered lives (millions)	40	39	39	38	35	34	35	35
Federal expenditures ($bn)	$392.6	$424.0	$457.4	$494.0	$533.3	$576.4	$623.0	$673.7
Federal share	$223.5	$241.3	$260.3	$281.1	$303.5	$328.0	$354.5	$383.4
State share	$169.1	$182.7	$197.1	$212.9	$229.8	$248.4	$268.5	$290.3
Cost per covered life	$9,815	$10,872	$11,728	$13,000	$15,237	$16,953	$17,800	$19,249
Growth rate		10.8%	7.9%	10.8%	17.2%	11.3%	5.0%	8.1%

We see that at best, it costs the government $10,000 per covered person in Medicaid, 19,000 in 2017! That is certainly more than regular health inflation. Why? Government planners are ignorant of market forces. What is the average health care plan cost per year? Massachusetts has the highest health care costs (and most gov. intervention), with the average cost being $4,400 in 2009. Government run insurance costs 2x as much as the average plan in the market. Not only that, but we spend 2x as much per person and get substantially worse care. And, Obamacare expands this awesome program by 50%? Should work out well.

In the end the government hurts the people it is most intending to help. We would be better off, cutting each Medicaid person a check and align their plans with real medical inflation than the black hole of inflation of a government program and let the market solve these problems. I want to abandon government solutions to problems not because people in need are unimportant, but because they are crucially important. 2x the cost for less quality.

Terrific. Only in government.

The Thesis

The government is generally ignorant of market forces and often creates a series of unintended consequences with the fruits of your own labors.


The Principle

The key insight of Adam Smith's Wealth of Nations is so simple: if an exchange between two parties is voluntary, then it will not take place until both parties believe they will benefit from it. The majority of economic fallacies derive from the believe that their is a fixed pie and that one party can only gain at the expense of another. As Reagan said in his UNREAL speech above, "people can't see a fat man standing next to a skinny man and not assume that the fat one got that way by taking advantage of the skinny one."The free market is a market of voluntary cooperation. Prices in the market emerge from these voluntary transactions between buyers and sellers can coordinate the activity of millions of people, each seeking his own interest, in such a way that makes everyone better off.

Capitalism means that no one is subject to arbitrary coercion by others. It requires people to be allowed to retain the resources they earn and create. Protection of ownership and property lies at the heart of a capitalist economy. Ownership means not only that people are entitled to the fruits of their labor, but they are free to use their resources without asking authorities first. The alternative is for the government to be entitled to our labors and then to decide what types of behaviors to encourage. The question is does government know what we want and consider important in our lives better than we do ourselves?

This is not to say that any one person in the market will be smarter than a bureaucrat, but it does mean that market participants (business owners and consumers) are in direct touch with their own particular corner of the market, thus responding to price fluctuations, and have direct feedback on supply and demand. Central planners can never collect all the information in all the given fields, nor are their nearly as motivated to be guided by it. Even if one person in the market is no smarter than a bureaucrat, a million people working together certainly are!

Example: if the government directs all resources to a certain kind of collective farming and it fails, the whole of society will be affected and, in the worst case, starve. If, instead, one group of people attempts the same type of farming, they alone will suffer the adverse effects and fails, then surpluses elsewhere in the market will mean no starvation. The risks of experimentation should be limited so society as a whole is not jeopardized by a few peoples mistakes. Oh trust me... they will make mistakes. But who should be making them? Individuals or government bureaucrats?


Conclusion

I know this is a long post, but it is worth it. Because.. "the more the plans fail, the more the planners plan." We need to be informed. The battle raging today is about is not just about tax rates, government spending, or your health, but it is about who should be making decisions... government planners or individuals. Looking at Exhibit A, B, and C.. I will take individuals every time.


Blake