As President Obama seeks to run health care, the car industry, and private banking the Wall Street Journal reminds us of a fact of history: Government can’t run a business.
Quick example: During World War 1 the government thought the steel industry was charging too much for steel armor for warships. So, in 1913 it decided to go into the steel business, promising the American people a 30% savings on the price of steel over private steel.
Three years later, after the conclusion of World War 1 and therefore past the need of cheaper steel, the government steel plant opened. Millions of dollars over budget it produced a single batch of steel before permanently closing its doors. And the cost of that steel? Rather than the 30% savings promised, it was actually 200% more expensive than the product it was supposed to replace.
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quick example.
Monopolies are rarely run to the benefit of their customers, and there is no larger monopoly than a government.
Whats worse, is that they can make all their customers buy their product, even when competition supposedly exists.
From that article:
So in this glowing success story of a government-organized turnaround, we managed to turn $7 billion in the late 70s into $1.65 billion a (high-inflation) decade later. We would probably have gotten a better return on investment by tearing up the rails and selling them as scrap metal and firewood.
JonD,
As the WSJ article notes:
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.”
If you consider health care a business, the government has done as imply fantastic job with the Veteran’s Administration.
No really, it has. Anyone who encountered the VA health system prior to the 1990s would shudder at how horrible it was–it was truly a death trap system–but today it’s almost universally acknowledged as among the best in the world and much better than most private health systems.
Of course, the health industry is very heavily regulated in almost every area so that may not be an entirely fair comparison. But a “truly free market” health care system doesn’t seem to really exist anywhere in the world, at least not anywhere that it’s any good.
In general, government isn’t best at being nimble or at adapting to market conditions. Nevertheless it’s not completely incompetent. And frankly, given some of the horrid incompetence and venal behavior [shudder, shudder] I’ve seen at Fortune 500 companies, I’m not THAT afraid of government intervention. At least government in this country (and others) has shown that it can learn from its mistakes and (generally) knows when to give up and deregulate.
We seem to have a decades-long pattern of regulating, deregulating, regulating, deregulating, etc. We’re in an up-cycle of regulating. It would be foolish to assume that’s a trend that will remain eternal. It almost certainly won’t be.
A couple years back I read an article that one of the Reno brothels got in deep with the IRS for back-taxes. The gov’t took direct control over ownership so as to use its profits to pay the taxes owed.
It lost money.
The gov’t couldn’t even make a whorehouse profitable. This does not inspire confidence.
Eric,
Come on, what a mischaracterization. First of all, an IPO doesn’t correspond to the total worth of a company. At the very least, you’re ignoring the fact that the railroad was highly profitable throughout the 80s (though the article regrettably does not give numbers). Not only that, but it served the public good in enabling other businesses to turn profits that they might not otherwise have been able to generate if the railroad had been carved up and sold for scrap metal.
And, to clarify, my point was not to suggest that the government is the right fix all the time, every time. Or that government intervention is a magic bullet that will transform any failing industry into a profit powerhouse. Kevin’s example from history is completely valid. So are the examples in the Wash. Monthly piece. Government has a mixed track record. But it’s dishonest of Kevin to claim it’s a fact of history that government can’t run a business. It has successfully run many businesses.
I haven’t been able to find exact figures for how much Conrail made during the 80s. According to wikipedia: “Conrail began to improve and reported taxable income between $2 million and $314 million each year from 1983 through 1986″
Assuming it was $2m in 1983 and exactly $314m the other three years, that’s just under $1 billion in profits returned to the goverment. Add that to the sale price, and the government still got back less than a third of the money it invested.
Not only that, but it served the public good in enabling other businesses to turn profits that they might not otherwise have been able to generate if the railroad had been carved up and sold for scrap metal.
That doesn’t serve the public good. That’s a subsidy to businesses that aren’t really profitable because their “profits” rely on the government selling them transportation at a taxpayer-funded loss. It’s equivilient to writing big checks to those companies and letting them pay market prices for freight.
Eric,
I didn’t get the sense that the IPO was a sale – the government retained ownership until a stock buyout at a price significantly more than the IPO. And how is it a taxpayer funded loss if the railroad is consistently turning a profit year after year? I should also note that you’re wrong in claiming that the $7 billion in federal spending was $7b in losses. The article claims that losses were as high as $1m/day for the first few years of its existence. Granting that every day was a day that bad, for the first 4 years of its existence, you only get to losses of ~$1.5b.
This discussion largely misses the point, though. First, the issue isn’t whether the government ultimately made money on the deal – though I think it did. It bought a highly troubled railroad and although it bankrolled deep losses initially, it quickly turned a failing rail service into a profitable one – and then ran that profitable service for a decade. Presumably, in the absence of political pressure, if the railroad had stayed public longer, the government could have made even more money. Second, even if we agree to call that particular example a loss (not justified, but for argument’s sake), it doesn’t undermine the broader point I was trying to make that the government has a history of running at least some of its business assets well.
I think the $7 billion number was the combination of operating losses, cost to buy the failed companies, and the cost of any capital improvements the government made.
I thought the IPO was a complete divestiture of the government’s interest in Conrail. If it wasn’t, you are correct that we also have to take into account the value of the government’s retained interest. I can’t find any good numbers for that.
You can’t just add up the profits and sale revenue and compare it to the set-up cost and accumulated losses. To do a true return-on-investment analysis, you also have to take into account the money being tied up for a decade before becoming profitable. Essentially, compare the profits to what you could have gotten by buying up $7 billion in treasury bonds between 1974 and 1982, reinvesting the interest, and selling them or allowing them to mature in 1987. I haven’t done this, partly out of lazyness, and party becasue I’d need a lot more detail on Conrail’s year-to-year income and expenses than I’ve been able to find. The IPO price reflected what prospective buyers thought Conrail was worth in the long term, taking cost of capital into account.
Profits, losses, and return-on-investment are very relevant when we’re talking about the government’s ability to run a business, because those are the measures of success and failure in business. If we’re not trying to make money, that’s a charity, not a business. The Conrail example shows that the government can turn a failed business into a business that turns an operating profit, but at the cost of a huge investment loss. We see Conrail, but we don’t see the businesses that weren’t started in the private sector because of the $7 billion taxed or borrowed out of the economy that otherwise would have been available for private investment.
If you have to “fix” it twice, exactly how good of a fix was it, really?
Eric,
the Conrail Wiki entry states that during the period 76-82 the total net operating losses amounted to $2.2b – I would have thought that capital improvements to its rail lines, and the cost of purchase (was there one? – or was it simply transferred to government control?) would have been included in a figure like that, but admit to total ignorance on that point.
In any case, like I said earlier, forget the Conrail example. For the sake of argument we can agree certainly that if it ultimately made money for the gov’t, it wasn’t much money – and as you say especially factoring in inflation it may have been a net loss. Kevin’s example of government ineptitude obviously stands. But there are other examples, of which Conrail may not be a great one, where the government has successfully run a business.
The other interesting thing I took out of the Wash. Monthly article was that the industries that required government takeover often were put into their mess by incoherent government regulation. And that, by actually becoming a stakeholder in the industry’s profits, the government was suddenly incentivized to revise the regulations to be compatible with profitability. I think if you take the stance that no government regulation is good, then obviously this is a pretty inefficient process – remove the regulation altogether and you don’t have to go through that lengthy process. But, starting from the position that the government has at least some role – and right – to regulate some aspects of industry in the public interest, then at the very least temporary government ownership of industry (with the end desire always to divest itself of the property to the private sector once it has been restored to profitability) can help to clarify for lawmakers and regulatory agencies exactly which of their regulations are helpful, and which are harmful.
All that’s not to say that the government is correct in this instance – I think only time can tell on that score – but there is at least more than one side to the story, and a facile declaration that “government can’t run a business” doesn’t reflect reality.
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