Monthly Archive for December, 2009

People complaining about government spending will often make the statement that government doesn’t grow the economy, it only consumes resources. The question that this has brought to my mind is why that would be the case. The common answer is that government doesn’t have to run things effectively because it is a non-profit funded by taxes. However, the fact that an organization has a non-profit based revenue stream does not mean it can’t still be effective. In fact, stock selling is a way that most companies raise capital without selling a product. In exchange for a partial ownership in the company, people contribute money for no actual product. The only reason any company has to be effective is because its owners require it to be effective. In this analogy, government is obviously owned by the taxpayers (who in a democracy also do so in exchange for a vote in how the company is run) and therefore if it is not effective in its goals the cause isn’t any level of inherent inability but rather a lack of expectation of effectiveness by the owners (voters/taxpayers).

The TARP bailout is an interesting example of government ineffectiveness. A year ago banks were in serious trouble due to poor lending policies having caused them to become overextended. Worse, because large banks were failing nobody wanted to lend money to allow them time to unwind their mistakes. This was potentially a huge opportunity for anyone with access to vast amounts of debt. Warren Buffett at the time claimed that someone with access to hundreds of billions at a low interest rate could make massive profits by assisting banks in extracting themselves from the mess. There are two things that a large stable government can do better than most private sector institutions. One is apply physical force to a situation, and the other is borrow large sums of money at lower than normal interest rates. The TARP bailout should have been an opportunity for the government to not only avert economic turmoil, but to do so in a way that presented a longer term profit rather than a loss.

So why are we now hearing that the profits from the loans aren’t even expected to exceed the losses? The answer is because we as owners of the government haven’t expected or demanded it, and the board of directors we hired are stable in their jobs even if they lose us money. The majority of banks are doing much better now, and are repaying their emergency loans. Those that are not doing well are going under, and the government is going unpaid. Why is this? Because the money paid out in emergency funding was often in the form of stock purchases or low priority debt in a bankruptcy. This seems the exact opposite of what one would do when loaning emergency funding to a troubled company. The ONLY form of funding that should be provided to a troubled company would be the kind that gets first priority in a bankruptcy, and all loans should have been at interest rates that more than covered the cost of the program.

People from a more “progressive” standpoint will tend to suggest that government spending should not be intended to be profitable, but that it is charitable spending that we should expect to never see a monetary return for. The problem with this approach is that it leaves no way to determine the effectiveness of the actions taken. Looking at the TARP loans, we have no way of knowing today whether the money was well spent or wasted, because its direct economic return was negative. Had it been profitable, it would have demonstrated that the money loaned out was multiplied by the borrower to create more wealth that was used to make the loan. When the borrow doesn’t pay back as much as was loaned, there is no way to know if what was done was positive.

I’d like to see this pattern of lending used in more cases as well. Someone needing health care might not be able to afford it out of pocket, but they are more likely to be at least a little more responsible in their spending if they know they will be expected to at least try to repay the costs at some later point. Obviously it doesn’t make sense to crush someone struggling financially under monthly payments, but once we help them back up doesn’t it make sense to prove we’ve actually made a difference by expecting repayment? The same is true of unemployment benefits and other welfare. Only expecting repayment on an “as able” basis is charitable, but not requiring any kind of repayment encourages abuse.

To summarize, I really don’t see any good reason why government CAN’T be effective, other than the fact that we don’t require it to be so. Using a more “corporate” governance policy for government charitable spending seems like it would be a good way to start.