Sunday, January 27, 2013

Do Government Run Businesses Work?

Our government has spent much money bailing out General Motors, Chrysler, Wall Street, etc.  And it has given billions to green companies, like Solyndra.  They do this because, they claim, government investment is crucial to innovation. 

They say that windmills won't exist if the government does not subsidize them.  And they're right about that because windmills are not cost efficient and are not an economical way to create energy.  Inside information: a windmill will take 10 years to break even, and will be obsolete in 20.  No non-subsidized companies will accept to wait 10 years before making money.  A private company would not like to wait five years before making a profit.

Are there any examples of subsidized companies working well, or not working at all?

Burt Folsum has some examples:

What examples from U.S. history support the transfer of funds and power from private to government control? In other words, do we have historical precedents for successful government subsidies to private companies? Also, do businesses owned by the federal government perform well?

Let’s review some historical examples. President George Washington experimented with government control when he supported passage of a law to set up a federally funded fur company for the Northwest Territory. President Washington thought this government-run company would help to prevent the British from encroaching on U.S. land, because agents of the British-owned Hudson Bay Company bought furs from the Indians in the Northwest.

Unfortunately, Indians and trappers alike despised the inefficient American company, but John Jacob Astor became a part of the solution. As a new resident of the United States, Astor founded his own private company and successfully bought furs from the Indians, making a fortune in the process. Under President Monroe, the U.S. finally disbanded the nearly bankrupt government company, sold its assets, and allowed the more competent private U.S. companies to do all the nation’s fur trading.

During the Civil War, President Lincoln signed a bill to build the country’s first transcontinental railroad from Omaha, Nebraska, to Sacramento, California. The federal government would do the financing. After granting roughly $60 million in land and another $60 million in federal loans, the bureaucrats were in dismay. The Union Pacific and Central Pacific had done a poor job of construction, and the road went bankrupt several times by the end of the 1800s.

Airplanes were another example. By 1900, some Americans worried that Europeans would invent the airplane and possibly use it to dominate other countries (including the U.S.) militarily. Government support, so the argument went, was therefore essential to stimulate Americans to inventive greatness. Samuel Langley, head of the Smithsonian Institution, received a federal subsidy to continue his research into manned flight. Langley conducted two public experiments with his federal dollars and launched his inventions on the edge of Washington, D.C. Unfortunately, both flights crashed ignominiously into the Potomac River.

Within two weeks after the second launch, the Wright Brothers–two bicycle mechanics from Dayton, Ohio–flew the first successful airplane at Kittyhawk, North Carolina, financing the venture with $2,000 of their own money.

For some reason, federal subsidy and control often diminish the chance of an enterprise being successful. In some cases, this occurs because federal officials don’t have the same abilities or incentives as entrepreneurs. Another reason is that federal control equals political control of some kind. What is best for politicians politically is not often what is best for businesses economically. Polticians want to win votes, and they can do so by giving targeted voters benefits while dispersing costs to others.

Asking the right questions focuses attention in the right direction: What federal subsidies and takeovers have ever improved the prosperity or quality of life for most American citizens? Until advocates of government-run businesses can answer that question clearly and with persuasive evidence, we should reject further federal intrusion in the U.S. economy.

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