How to Make Money, Government Edition

Economic crashes are inevitable, unless the government freezes our entire economy so tightly that no one is ever permitted to try anything new.  The resulting lack of economic growth would be unacceptable and would lead to regime change at the next election, we hope.

Right now, our political classes are chattering about cutting government spending.  This is utterly necessary, but unfortunately, Washington seems to be able to think about only one thing at a time.  Cutting spending is vital, but it would be even more helpful to increase economic activity.

Increased economic activity would create more jobs and lead to more government revenue without raising taxes.  Unfortunately, our government has become so obsessed with the importance of government, so bound up in what happens inside the Beltway, that they think that the only ways to balance the budget are to cut spending or raise taxes.  They've totally forgotten the far better way - behave in such a way that businesses can grow, increasing economic activity by creating jobs.

The government gets a piece of everybody's action.  If the amount of action increases, government will automatically get more tax money without raising tax rates.  This article discusses a number of mundane but quite effective ways that a well-run government can increase economic activity and thereby increase tax revenue.

Infrastructure

Transportation costs are pure overhead - the less transportation costs, the more efficiently the economy operates.  Our experience with Amtrak and countless other government-funded transportation systems shows that government can't operate transportation systems effectively, but government can encourage useful infrastructure investment.

In the early days of the republic, the state of New York paid for the construction of the Erie Canal.  The canal was hugely more efficient than land-based transportation; the tolls paid back the construction cost and covered all the corruption as well.  More or less the same thing happened with the Panama Canal.  Eisenhower's Interstate Highway System didn't generate toll revenue, but the increased taxes from economic growth more than paid for the cost.

Unfortunately, there are very few remaining opportunities for such cost-effective investment in America; Mr. Obama's dream of high-speed rail is just another government boondoggle.

For a sensible, economically-minded government, getting roads and railroads working is a good investment, but the government shouldn't plan on actually operating them once they're constructed.  Long-term government operation of anything leads to unionization, padded costs, inefficiency, and loss-making businesses in every country where it's been tried.

Since all the effective infrastructure has already been built, the government should get out of the business of running it.  Shutting down Amtrak and turning rail operation over to entrepreneurial outfits such as Sir Richard Branson's Virgin Rail would improve efficiencies, create jobs, and take more cars off the road.  Selling toll roads not only brings in a lot of money now, we also end up with our toll money subsidizing fewer politicians' in-laws.  What's more, as countless examples illustrate, privately-operated for-profit entities are generally far quicker about repairs and upgrades than government - because they directly benefit by increasing capacity and thus garnering more customers, which is the point.

Shared Research and Matching Funds

Genuine research leads to tremendous economic growth, but our peer-review system for allocating research funds guarantees that nothing cutting-edge will be funded - geniuses have no peers.  What's worse, nobody wants to be blamed for funding something that fails, but by definition most really out-there research leads nowhere.

Experience shows that letting government set the research agenda often ends up with bureaucracies controlling the business from the start.  Nuclear power and general aviation come to mind - neither business can go anywhere because government is overly involved.  Private space exploration might take off now that NASA is deservedly out of the business, as long as the FAA doesn't kill it with regulation.

The Japanese approach was to identify issues that affected every business in an industry, then set up a joint research program funded partly by government but mostly by the industries involved.  Making the industry put its own money on the line tended to keep research focused on actual problems. 

That's how they approached the US government regulations which limited the pollution which automobiles could generate.  The government came up with some money and assessed each of the auto companies based on their total sales.  All the research was shared equally.

Once the research was done, the companies could use it however they wanted.  Government sponsorship shamed everyone into contributing ideas and technology; industry funding kept the program focused, and saved all the companies a great deal of money and risk.  In the US, all three big auto companies had to repeat the same research, which meant that 2/3 of the money was totally wasted.

Agricultural research is particularly important.  The world's population is still growing and the "green revolution" which increased worldwide food supplies is running out of steam.  Alas, there's so much government-imposed distortion of food markets all over the world that it's difficult to imagine any private company making a lot of money investing in agricultural research.  If governments could relax some of their regulations on newer, more productive food varieties, they'd not only gain tax revenues from agribusiness and farmers, hungry people would be fed more cheaply.

A Predictable Court System

A court system had two basic functions - helping the government protect citizens from violence and helping enforce business agreements.  Our Constitution established "due process of law" to protect citizens against arbitrary arrest and imprisonment, but that system has broken down in recent years.

In 1976, the Supreme Court ruled that prosecutors have absolute immunity from civil lawsuits.  They acknowledged that their ruling left a defendant who had been wronged with no means to obtain justice, but said that the alternative of prosecutors facing lawsuits every time they lost a case was worse.  Thus, although the 5th Circuit ruled in 1992 in Sanders v English that your rights are violated by prosecutorial misconduct, the earlier Supreme Court ruling meant that there was nothing you could do about it.

Prosecutors are rated by how much jail time they inflict, not by how well they uphold justice.  The perverse incentives in our justice system have led to precisely the results we’d expect – justice is being systematically perverted in favor of self-interest by the bureaucrats.

USA Today documented  the story of Nino Lyons who spent three years in jail for dealing in drugs.  The prosecution called many witnesses who testified that Lyons had sold them drugs, but never revealed that a) most of the witnesses were prison inmates or b) some of the inmates had been promised early release if they testified against Lyons, in effect bribing convicted felons to lie in court.

In another case, prosecutors offered green cards to illegal immigrants in return for their testimony against an accused government official, once again offering a valuable reward for false testimony.  We would not tolerate a prosecutor who gave a witness a suitcase of cash; why do we permit prosecutors to give a far more valuable green card instead?

Our courts aren't doing much better at enforcing business agreements.  American lawsuits are so expensive that most foreign businesses would rather be sued in Russia or China than in the US.

Fortunately, the credit card system has taken over enforcement of most business transactions.  When you get a credit card or a merchant gets the right to accept credit cards, all parties agree to let the card network decide disputes between merchants and credit card holders.

About 1% of card transactions are disputed; every day, the card networks make tens of thousands of decisions that once were handled by the courts, are virtually never challenged outside of their own appeals systems, and at a fraction of the cost.  Justice can be done; our government is simply too sclerotic to do it.

Setting Standards

Setting sensible technical standards boosts the economy.  Requiring that GE light bulbs work with anyone's sockets improves efficiency, for example.

Years ago, each electric company had their own proprietary standards for bulbs, appliance plugs, and even for voltage.  You can imagine what that did to the prices customers paid.

It's important to be sure that nuts bought in one part of the country fit bolts bought elsewhere, that screws make in California fit screwdrivers made in Maine, that coffee makers work anywhere in the country, and so on.  Making products interchangeable makes the overall market bigger, which brings out competition which reduces costs.

There are two basic ways to set standards - have government committees write standards into law or have private organizations agree on standards.  Depending on the industry, the United States uses a mixture of both methods, which work sufficiently well that few people even think about them anymore.

Unfortunately, our government is drifting towards a monolithic system of having standards be set by the bureaucracy.  The Wall Street Journal reports:

The EPA, which is under pressure from congressional Republicans and business leaders, said Wednesday that it had found ways to cut the overall estimated cost of complying with its proposed curbs on mercury, soot and lead emissions to $2.1 billion a year from $3.9 billion.

EPA standards do nothing for economic efficiency, they're pure cost.  What's worse, the EPA is notorious for lowballing cost estimates and overstating the benefits of its regulations.

The Problem

The problem in the US is that government has been able to raise taxes pretty much at will for so long that they've forgotten that all taxable value comes from the private sector.  No bureaucrat, no politician, no government agency thinks that its exactions matter much, but the sum total of government cost will take us down.

It would be simple for the government to encourage economic activity if it wanted to, but they don't.  As noted earlier, there will be another crash, assuming that the government lets the economy grow enough that we can have another crash.

Letting our economy fall completely apart would prevent another crash, of course, but the cost would be a bit higher than we ought to be willing to pay.  Unfortunately, that seems to be the Obama administration's approach - a very significant Change from all previous American history, but alas, not terribly Hopeful.