Government Is A Lousy Investor

John Tamny makes the point in his Forbes article, Oct 29, 2014, that even the savviest investors in the world would become blithering idiots when it comes their investments if they were in Government service, whether as politicians or bureaucrats.

Key points:

An economy grows based on information, good and bad, reaching investors and entrepreneurs. Silicon Valley thrives today not because all of its companies and start-ups succeed, but precisely because most of them fail. It’s through this constant experimentation with new ideas, good and bad, successful and unsuccessful, that entrepreneurs, businesses and investors attain essential information about what people desire, what businesses need in order to grow, what business practices need to be encouraged, and which ones need to be banished.

The reality once again is that the vast majority of start-ups in Silicon Valley fail. This is fact. What’s also fact is that when businesses there implode they don’t have an unlimited line of credit to continue committing the same capital-destroying errors. Eventually investors run out of patience, the business is shut down, and the assets sold off to individuals possessing a stated objective to manage them more profitably.

Readers should compare this to government, and when they do it’s important to stress that this is true no matter the ideology of the politicians allocating the money. When politicians spend or invest, they quite simply do not labor under the same market-driven disciplines as private investors do. As the failure rate in Silicon Valley reveals rather plainly, private investors are quite fallible, and yes, they are all-too-capable of funding egregious Solyndra equivalents.

But here’s the major difference: when theglobe.com falters, investors quickly starve it of capital so that it can destroy no more. When politicians spend, they have an unlimited source of funds – you, me, Michael Dell, and Larry Ellison – to tap such that they can continue supporting that which doesn’t work. Businesses disappear on a daily basis, while government programs are generally forever.

While Silicon Valley ruthlessly kills off its capital destroying losers so that better ideas can be funded, government – no matter the Party in power – continues to support its duds.

Too often in modern times the debate about government spending has focused on the breathtakingly dumb programs, and wasteful subsidies. This misses the point. Of course many of them are dumb, just as many private sector creations are laughable. The difference is that in the private sector Berkshire Hathaway’s Warren Buffett must eventually sunset his bad ideas, while a Senator Buffett would face no such constraints.

For investors to be successful, they must have losers. Politicians generally can’t lose thanks to nearly unlimited funding from a coerced electorate that is powerless when it comes to forcing them to shut down their many Webvans.

Unsaid, but certainly implied, it’s the pursuit of profit and avoidance of loss that drives entrepreneurs.  Remove the potential for loss, add a political motivation and a budget that grows annually regardless of performance, and you get the rank stew of statism and cronyism.

Implicit as well, is that electing businessmen to political office may have zero impact on good governance, for the reasons cited.  Making better business decisions is impossible without economic consequences.

The discipline coming from the necessity to make a profit is what makes investments “green” and “sustainable.”  I could support this type of green environmentalism.

 

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