Tuesday, June 20, 2006

If government is always less efficient than private industry, why didn't private companies build these big, overarching projects?

Good to be back from vacation. If you read my last post, you know that I was gone on vacation.

My girls did the Arizona Cinderella pageant. I say, ‘did’ rather than ‘compete’ because it is far more than a pageant (if that were all it was, we would not be interested.) It is a youth development program that has really helped mine develop and gain confidence and grow in many, many ways, while at the same time having a lot of fun (and I do mean a LOT of fun—sure leaves dad tired though from all those parties.) Then we went hiking in Yosemite.

All week though little things kept reminding me of the successes of government, and contradicting the claims of those who claim that private industry can do things better. In fact, the great and visionary things often are done not by private industry, but by government. And often private entrepreneurs benefit as a result. Let me list a few examples that occurred to me (in italics, the benefits to private entrepreneurs):

1. The National Parks System. President Theodore Roosevelt had a vision, and he put it together, often over the strenuous objections of those who believed that there were no uses for wilderness other than trapping, logging and mining. Of course, millions of square miles of America—about 98% of it in fact, is outside of these preserves, and so are still available for industrial use, but President Roosevelt’s vision has guaranteed that the beauty of certain places in nature, like Yosemite, will remain for future generations. As an example, my daughters and I were hiking along a stream, and they saw some bright yellow flashes in the sandy mud on the bottom. Having once been an amateur geologist, I can tell the difference between gold and pyrite, and I could tell right away that it was gold (remember where we were too—in the Sierra Nevada, not so far from Sutter’s Mill). Of course, we did not have the equipment to pan for gold, and even if we had, we would not have done so—my daughters understand the need to not take anything from a National Park, and leave it as they found it, so that perhaps one day their kids can see it as they saw it. Many people today make their living working in and around national parks—and tourism is a much larger source of revenue than mining, and unlike mining it is renewable—there will always be more tourists.

2. The electric grid On May 11, 1935, Franklin Roosevelt created the Rural Electrification Agency. His vision was of a country on a power grid, so that even small places (which then had no electricity) could receive power even if it was from an electric plant several states away. Further, while large cities had electricity, prior to the creation of the grid, there was no way that, for example, surplus electricity generated in, for example, Chicago, could be sent to Detroit if Detroit was running short. With the grid, that happens routinely. Despite aging equipment, electric shortages are today far less common than they were in the 1920’s and 1930’s before the grid was in place. Try doing business in today's world without electricity. Probably impossible for most businesses. And units of energy are routinely bought and sold on the market. Other than abuses in this system, most notably Enron-- which could have been avoided with stricter oversight from Federal and state regulators-- the system has worked pretty well.

3. The Federal Savings and Loan Insurance Corporation. This corporation was also a creation of the Roosevelt administration, as part of the National Housing Act of 1934. In fact, it is not itself a Federal Agency, but a private entity. It however had the implied backing of the Federal government (the only time this was tested was during the Savings and Loan crisis of 1986-1987, when the Federal Government bailed out the FSLIC). The FSLIC underwrites loans that banks make to small businesses and individuals. Want to start a business? Chances are that you will need a bank loan to get started. Without the FSLIC, banks would be on their own to cover bad loans, and so it would be much harder to get that loan (especially given the failure rate of small businesses) and the rates would be much, much higher. With the FSLIC (and ultimately, as 1987 showed, the Federal Government) underwriting your loan, if you have good credit and a sound business plan, you can probably get that loan.

4. The splitting of the atom. A few years ago, a panel of scientists voted this the most important scientific achievement of the twentieth century. And again, it would not have been done without the government. In fact, the Manhattan project was so secret that it was 100% done by the government, and only those private businesses who absolutely had to know that anything at all was being done, knew it. And say what you will about Hiroshima, but let’s not forget that in those days there were people like Hitler and Stalin in the world who, had they developed nukes, would have had no compunction at all about laying waste to entire countries to further their evil plans. Today, nuclear energy provides 21% of the electricity in the United States, and over 90% in countries like France. Of course, it has its drawbacks and may be a dubious benefit, but to claim that the Manhattan Project was somehow a failure or inefficient because it was done by the government instead of private industry is ridiculous.

5. The eradication of smallpox worldwide, and of malaria and polio in America. This was a vision during the 1950’s and 1960’s, and became a reality, thanks to government. There was no profit in going into small, impoverished villages in India to give expensive smallpox vaccines to the children there, so if this was the purview of private industry, it likely never would have been done. But governments from around the world, assisted by some lesser amounts raised by charities, paid to have this done. Unfortunately, the eradication campaigns against polio and malaria ended with those diseases still present in parts of the third world. Today, most people in developed countries have no longer been vaccinated against them anymore so polio and malaria are starting to re-emerge. But that is a result of not doing what was done with smallpox (largely because it was considered too expensive), rather than because of inefficiency. The government was efficient in doing what it wanted done in America. Do I even have to point out how not having smallpox, polio and malaria in America benefits entrepreneurs? Health care costs and productivity benefits aside, not having these deadly diseases in America anymore benefits everybody.

6. The Interstate Highway System. In the 1950’s, President Eisenhower had a vision of an America linked together strategically (remember this was during the Cold War) and commercially by a series of high speed, direct highways linking major commercial and population centers while bypassing smaller ones and replacing the patchwork of two lane highways that then allowed people to drive across the country in about a week. On the interstate, it can be done in half that time. True, it has been devastating to the economy of small towns that used to line many of the two lane highways that are now no longer in use, but ”Anything you’ve got, a trucker brought it”. The impact of the Interstate on commerce and business has been enormous, and well worth not only the initial investment to build it, but the ongoing taxes paid to maintain, improve and expand it. In fact, in most states as well as in the case of the Federal Government, gasoline taxes mostly are earmarked for the construction and maintenance of highways and other roads. Yet, with the high price of gasoline, I’ve heard some people propose getting rid of gasoline taxes. I wonder whether they would complain if this happened and then the roads started to fall apart under them. Some people still expect that they can get something for nothing.

7. The Space Program. In the 1960’s, President Kennedy had a vision. He said that by the end of that decade, America would land a man on the moon. And so it was. But since that date, despite budget cuts in the 1970’s and after that led to a series of failed missions and the space shuttle being relegated to doing eighth grade science experiments, NASA has still had its share of successes, the most spectacular being the Hubble orbiting telescope that has allowed us to peer deep into space, witnessing events billions of light-years away (and so billions of years into the past). Forget liquid crystals and tang. The space program has brought us satellites, allowing communication by cell phones, televisions and now wireless internet instantaneously all over the world—with enormous commercial benefits. We can even use GPS systems to find a lost hiker in Colorado or track a stolen vehicle and lead police to it. And private industry? Well, after finally making it into orbit last year, there are plans to open a private spaceport in Southern New Mexico to take tourists into space at up to $200,000 a pop. In other words, to do what astronauts were doing in the early 1960’s.

8. The Internet. That’s right, this one you are on right now. Of course, as early as the 1970’s, there were small groups of research institutions and government agencies that were linked together via computer, but only for specific sharing of research or information (and these by the way were also generally public institutions.) In 1988, Al Gore wrote and shepherded through Congress the specific piece of legislation, the National High-Performance Computing Act, that established the infrastructure and the process to link universities and research institutions together on a national level via a shared network. Then in 1992, he co-sponsored the Information Infrastructure and Technology Act, which opened the network to private traffic. Also that year, as a candidate for Vice President, Al Gore introduced the term, ‘information superhighway.’ His vision consisted of an international ‘trunk’ which would link potentially billions of individual computers together to participate in a free and open exchange of information. In 1993, Gore, then a member of the Clinton administration, got the administration to implement a tax of a few cents a month on local phone bills to finance the construction of this network.. Within a couple of years, the internet was up and running (though in a form somewhat different from Gore’s original vision) and has grown exponentially since. Let me ask you? Do you even notice the tax on your phone bill? And if you do, would you trade the internet for those few cents a month? The commercial and proven business power of the internet is enormous. Many people earn a very good living strictly online. Of course, many entrepreneurs make money as local points of access (internet service providers). Unfortunately for Gore, he misspoke in the 2000 campaign when he said he 'invented the internet.' In fact, he no more invented the internet than Henry Ford invented the automobile, but like Ford, he deserves credit (which he will likely not get for many years, if ever) for making it available to more than the select few.

9. The Human Genome Project I recently wrote a complete post on this one: May 18, 2006: Human Genome Project Complete; A Triumph for Public Research Funding. Without going through that entire post again, I made the points that 1) Governments (this was an international project though led by the British) had taken the lead in funding this research, though they had and benefited from partnerships with private industry, 2) private industry (Celera) had tried to beat them to the end and failed, in fact given up because the undertaking was so huge, 3) this could be a win-win situation for the government and the drug companies, and most importantly: 4)

the genome, now completed, is free and accessible to anyone who wants to look at it. Suppose for a moment, that a private company had in fact carried out this project and sequenced the entire genome. Do you suppose they would simply open it up to free inspection, and tell potential competitors, 'Here?' They would have guarded it like Colonel Sanders guarded his secret recipe, and if they let any of it out at all, you can be sure that it would have only been in pieces, and at a hefty price. In the long run, research into applications would be limited only to that company, and to those who they chose to give the information to. And to compound matters, competitors, not willing to allow that situation to continue permanently, would have certainly begun their own DNA sequencing project. So, the same research would probably be done half a dozen, a dozen or even more times, resulting in a tremendous waste of academic resources. But now, none of them will have to do that, they can go to the public database of the project, and go get anything and everything they want either for free or for a nominal fee.

That is the end of the quote, but let me be clear (the following italics) about the benefit to private industry: With this research now done and accessible to all, it helps all of the companies looking for the miracle cures for diseases that this promises to open up. They can still compete with each other, but the Genome project is like a card that tells everyone in a game to move ahead ten spaces. The path to the new cures will be shorter and more direct, for everybody. If anything, the ones it really helps the most are the smallest players, the startups and other pharmaceutical companies with limited resources who now have the same background genetic information available as the large manufacturers.


Anonymous said...

sounds like you did have a great vacation... and yet... you let your mind wonder to the world of politics... :)

shrimplate said...

Not to sniggle, but the Gore quote is an urban legend.

What he really said.

The US government is *not* always more inefficient, and Social Security is a fine example of just how effective good governance can be.

But albanaich is correct when saying that big business self-serving from the government teat does lead to inefficiencies that do not benefit all citizens. It leads instead to facsism.

Anonymous said...

Hmph... The extremes always see it as just one thing or the other, and never see that we're better off with a middle ground. The fact it, Government can do certain things better than private business. And private industry can do many other things better than Government.

The big problem is finding a balance between the two. It's a grossly complex problem. A grossly simplified answer is basically this: Given any problem, if a private business can solve the problem in a way that would make them a profit, then they should be given the chance to do so. Otherwise, and usually as a last resort, the problem can only really be solved by Government.

It's never that simple, of course, but just because you don't see a profitable solution, doesn't mean you should rush to have Government solve it. It just means you need to find more creative solutions.

Anonymous said...

Welcome back, Eli. I'm glad you and the family had a good vacation.

I'll echo Steve's thoughts on the remainder of your post.

Eli Blake said...

Steve B and Indy Voter:

The title of the post was 'If government is ALWAYS less efficient...' which is the mantra of the right.

No question, that private industry is more efficient in providing small scale services to individuals, or even large projects like producing enough consumer products for everyone. My point though is that the success of private industry compared to the government ends when we get to these sorts of large projects.

And we have some on the table. Climate change (you can stick your head in the sand all you want, it's here-- I'm watching it out my window right now, as I am now certain that 2006 will join 2002-2005 as the four most destructive fire seasons in Arizona history as more drought, heat and bark-beetle killed forests are burning and making things smoky around here) is one of them. We still have to rebuild New Orleans (just because it has receded somewhat from consciousness doesn't mean that we want people living permanently in refugee camps in America, but it's a year later and they are there.) And health care-- we now spend more per capita on health care (or as a percentage of GDP) than any other country in the world, and the result we have is that people don't live as long as in other countries, and we have more infant mortality. Heck, even Fidel Castro's Cuba has surpassed us in both of those statistics, which should be a national embarrassment.

Small projects-- go ahead and get private industry involved. But when it gets big enough, that is when you need the government to (in the words of one very famous corporate slogan) "Just do it".

Anonymous said...

I don't agree that the size of the project to be undertaken is the compelling reason for government intervention. The reason for government intervention is because there is determined to be a compelling reason to address a specific problem which supercedes the actions of market forces. I'd add a couple more items to your list: emissions standards for automobiles (I like having breathable air!) and the funding of the coast-to-coast railroads in the 19th century.

I think several of the items on your list could have occurred without government intervention, btw, but they happened faster and in a more coordinated matter because of military needs. Scientists in the late 1930's were just discovering the potential inherent in uranium, and had not WWII intervened I think they would have developed their own version of the Chicago Pile to prove fission was possible and sustainable; from that point its application in power generation would almost certainly have followed. Similarly, exploration of space would have occurred without the cold war competition for the control of the skies between the US and USSR.

Contrary to your text, the internet also has its roots in the defense industry of the 1980's (maybe even the 70's), and was heavily funded by DARPA; a number of my friends from college were strident advocates of ArpaNet, EtherNet, and similar communications products during the Reagan years. I list this separately because I don't believe the internet could have come about without government establishing the basic protocols on which the net operates. Without government the internet would be like Beta vs VHS in vcrs, or worse, like Commodore, Radio Shack, Apple, IBM, et al in the early years of personal computers. Overcoming the obstacles to communicating between different protocols would have delayed the net for years - maybe decades - and would have driven its costs up dramatically for users.

Karen said...

Ditto the *welcome back*.

"yet... you let your mind wonder to the world of politics"...

...it's hard not to, eh?

Eli Blake said...

Indy Voter:

I'm not sure how your point about these small networks is contrary to my text. I said very clearly that they were around as early as the 1970's. But it wasn't until the 'Information Superhighway' was built that people were able to all access the same web. And Al Gore does deserve credit for that (although as shrimplate points out, his exact words were not 'invented the internet' but that he had advocated in Congress some of the precursors from which the 'modern internet was created' although he also pushed for and got that small phone tax that actually paid for it.)

True also, that you can make the case that almost all of these things would have eventually gotten done without the government. I made that case myself in my post on the Genome project, just it would have taken much longer, wasted far more resources (since competing teams of scientists would have duplicated research efforts in secrecy from each other) and would have benefitted mostly the big guys at the expense of smaller, possibly more innovative entrepreneurs who would not have had the resources to research it themselves and would have had to buy whatever they could at whatever cost from the big guys.

Anonymous said...

Eli, your response to Steve and me, and your intro to the main post as well, indicate that you believe that government was more "efficient" in the examples you cite. My argument - and the reason I endorsed Steve's comment - is that government's intervention in those areas occurred not because it was felt that government was more efficient than the private sector but because it was felt that the private sector, relying on market forces, could not have met the need. And letting the market work is what the "efficiency" argument boils down to for conservatives.

I know of no conservatives - other than perhaps some of the fringe elements of the Libertarian Party - who believe that efficiency and market forces are always the best way of addressing problems. The most commonly cited example of this is defense spending, but I've never heard conservatives call for selling our road system (interstate or otherwise) to private interests. Conservatives acknowledge that there are areas where government needs to take action rather than relying on market forces; where they disagree with liberals is on whether specific issues warrant such intervention.