Saturday, November 16, 2013

The Business of Government is Business

But should government be in business?

In an address to the American Society of Newspaper Editors in 1925, President Calvin Coolidge said:
It is probable that a press which maintains an intimate touch with the business currents of the nation is likely to be more reliable than it would be if it were a stranger to these influences. After all, the chief business of the American people is business. They are profoundly concerned with buying, selling, investing and prospering in the world. [emphasis added]
Since we have government of, by, and for the people, it's reasonable to say that the business of government is business – not directly but through the people that own and run businesses.

That doesn't mean that government should favor the interests of the business community over the interests of people that don't own or run a business. But it's important to remember that businesses create 84 percent of jobs in the United States. In comparison about 16 percent of all jobs are with federal, state, or local governments, and about 21 percent of Gross Domestic Product is government spending. If the private and public sectors grow at the same rate, businesses will create about five times as many jobs as government.

The notion that we are a nation of businesses isn't about pitting "labor" against "business". I'd argue that in countries where government dominates business, labor has a weaker hand. Certainly in "company towns" and areas where the local economy is not diversified, employees don't always have much from which to choose. In these areas the best choice is not to grow government but have a government that encourages private-sector competition and economic diversification.

We often hear about state-owned enterprises (SOEs) in current and former communist countries. But guess what? We have them in the United States too, and you don't have to look any further than state-run liquor stores. While the current administration here in the Commonwealth of Virginia suggested divestiture of ABC stores, a profitable bottom line changed the calculus and weakened the political will for change.

At the federal level, the drive to divest government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to the private sector has slowed for several reasons: profitability, policies tilted in favor of implied subsidies through government guarantees, and public preference for 30-year mortgages. Instead let's have the private sector run these businesses with sufficient oversight of the secondary mortgage market to ensure competition, full disclosure of information for consumers, and mitigation of systematic risk.

I know I've jumped around a bit here so let me circle back. Government has an important and significant role in the United States and our economy by providing public goods and services that the private sector can't provide efficiently or profitably. But there are industries where government is acting as a business even though the private sector could provide those same services more efficiently at lower cost to consumers and taxpayers.

The key for government is to have an exit strategy for its businesses. That, for politicians, is a challenge when their payoff is legacy.