John Steele Gordon: Why Government Can't Run a Business

Roundup: Historians' Take

[Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004). ]

The Obama administration is bent on becoming a major player in -- if not taking over entirely -- America's health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government's track record in running economic enterprises. It is terrible.

In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.

When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.

Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.

These examples are not aberrations; they are typical of how governments run enterprises. There are a number of reasons why this is inherently so. Among them are:

1) Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen. The gathering disaster of Social Security has been obvious for years, but politics has prevented needed reforms.

And politicians tend to favor parochial interests over sound economic sense. Consider a thought experiment. There is a national widget crisis and Sen. Wiley Snoot is chairman of the Senate Widget Committee. There are two technologies that are possible solutions to the problem, with Technology A widely thought to be the more promising of the two. But the company that has been developing Technology B is headquartered in Sen. Snoot's state and employs 40,000 workers there. Which technology is Sen. Snoot going to use his vast legislative influence to push?....

6) Successful corporations are run by benevolent despots. The CEO of a corporation has the power to manage effectively. He decides company policy, organizes the corporate structure, and allocates resources pretty much as he thinks best. The board of directors ordinarily does nothing more than ratify his moves (or, of course, fire him). This allows a company to act quickly when needed.

But American government was designed by the Founding Fathers to be inefficient, and inefficient it most certainly is. The president is the government's CEO, but except for trivial matters he can't do anything without the permission of two separate, very large committees (the House and Senate) whose members have their own political agendas. Government always has many cooks, which is why the government's broth is so often spoiled.

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."...
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James W Loewen - 5/23/2009

In addition to the fact, pointed out effectively in the foregoing comments, that some private businesses don't work well, some public businesses do. When I lived in VT for 21 years, I lived 200 yards from Burlington, which enjoyed electrical rates much lower than mine, mainly because their electricity was municipal while mine was "private." Moreover, had it not been for the public oversight of such private monopolies as Green Mountain Power, lax as it was, my rates would have been higher still. Meanwhile, though I lived 100 yards from a major power substation, my power was interrupted more often than Burlington's. Finally, Burlington's power came from a creative multiplicity of sources, including wood chips.
Though I am no socialist, it's too simple to chant, "public business bad, private business good."

william e vanvugt - 5/22/2009

Indeed. As one who not only read "Empire of Wealth" but also adopted it for a history course, I'm a bit surprised by the author's simplistic rant here. Obama doesn't want to run these industries--that is obvious. What is also obvious is that those who have been running them are not only incompetent, but looking for the short-term and for themselves. If the recent meltdown is not evidence for the failure of laissez-faire, then what is?

Ernest T Spoon - 5/22/2009

I stopped reading after I finished reading this sentence:"But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud."

Obviously the author of this essay, John Steele Gordon, has never had to deal with a private bureaucracy. Let us hope he never has to in the future either. I have found little or no difference in dealing with any bureaucracy, whether it be public or private, save a public bureaucracy is more accountable to those it serves than its private counterpart.

Moreover the reason government operated enterprises fail in the United States is that politicians, from presidents on down, under the advisement of their corporate donors see to it that they do in fact fail; thereby continuing the illusion that capitalism, or as the MSM likes to term it these days the free market, does work efficiently and effectively and toward the greater public good.