More "Government Coersion = Freedom" Arguments

The other day, I posted on a NY Times editorial that attempted to make the point that a coerced and conscripted army was more consistent with freedom and democratic values than an all-volunteer army.

This aggressively ridiculous position is none-the-less repeated by statists every day in many contexts.  Today I will focus on a post by David Sirota on the Huffington Blog.  Its premise is that government ownership of commercial assets is more conducive to freedom that private ownership.  I could probably have found a more serious writer to Fisk, but I am bored this afternoon and needed some fun.  Besides, its fun to see someone actively channeling some of the minor characters in Atlas Shrugged.

First, to be fair, I have to start with a strong point of agreement with Mr. Sirota:  Both of us are frustrated with the corporate welfare, subsidies, eminent domain land grabs, new stadiums, and incumbent protection laws handed by all levels of government to various corporations.  Mr. Sirota cites the stadium example in particular, which has always been a pet peeve of mine as well:

Usually, government is in the business of handing over huge amounts of
our taxpayer money to corporations, so that the corporations can just
take all the profits, and charge whatever they want to the customers.
That's been the backbone of the recent spate of high-profile stadium
deals, whereby city and state governments just fork over cash to private pro sports teams,
while getting no share of the massive profits in return, and letting
those teams charge higher and higher ticket prices to the fans whose
tax dollars are supporting them.

I feel fairly well protected on the price angle by the fact that I can just choose to not go to the games, but he is right that the government is handing over stadium money with little to show for it in return.

But this is where he and I diverge.  My answer is to stop crony capitalism, and to stop using government money and regulatory authority to support favored businesses.  Mr. Sirota goes the other direction, which one might call "in for a penny, in for a pound", of having the government continue investing in businesses but to do so on the government's own account.

ordinary Americans are realizing that there's an alternative path,
whereby community ownership of certain economic institutions and
businesses are a pretty good deal. Instead of allowing Corporate
America to reap the windfalls of everything, more and more communities
are trying to get a piece of the action "“ all while making sure the
public is adequately served, and not abused.

The highest profile example of this is in municipal broadband, where city governments are developing taxpayer-owned high speed Internet networks.
Instead of allowing Verizon or other corporations to control Internet
access and rake in all the profits from it, these communities are
making Internet access a public utility and sharing in the profits.
These communities can make some money at it, while doing the public a
service by keeping rates low.

I will accept his chosen example of broadband networks. I will also, for today, give the author a break and not challenge the bizarre notion that replacing a private company like Verizon who has a 5-10% profit margin with an inefficient government bureaucracy can yield substantial cost savings for customers AND fat profits for the municipal government.  In fact, I will leave the obvious efficiency arguments behind entirely and only discuss the morality, the right and wrong involved in his proposition.

Ownership and Capital Investment
Corporations like Verizon are owned by communities of millions of ordinary people through a mechanism we call "stocks".  Even the few large shareholders of Verizon tend to be investment funds, which are really just vehicles for aggregating ownership of many many ordinary people via mutual funds and/or the pension obligations they back.  Owners of Verizon provide capital to the company through their stock investment in an uncoreced transaction and of their own free will.  Their ownership is evidenced by actual paper shares, and is portable, such that they retain ownership anywhere they live, even overseas.  Investors at any time, if they don't like the company's performance or prospects, are able to cash out at the market price, and companies routinely return a portion of their surplus to them in the form of dividends.  Investors elect a board of directors to steward their investment in the company, and can throw these directors out any year with a 51% vote.  The company they have invested in must provide them clear reports quarterly using GAAP accounting rules about how their investment is fairing.

Contrast this to a municipal-owned broadband network.  In some sense, all members of the municipality have an ownership interest in the network, but they receive no documented evidence or guarantee of this ownership.  Local citizens are required by law to contribute capital to the enterprise via their taxes.  Their investment is mandated by the state, is not optional, and non-investment (via non-payment of taxes) is met with a prison sentence.  Once their money is invested, they may not sell their interest or in any way recover their investment.  History has shown that surpluses in municipal owned business seldom exist, but when they do, they are never returned to the citizens, but are spent in other government functions at the whim of the local authorities.  If the citizen moves, he loses any benefit of his investment.  Municipal authorities seldom produce financial statements for these enterprises, and, when they do, they would never pass GAAP muster.  Since the author mentions Enron, I will say that Enron had cleaner financial statements than most government entities.

The author clearly prefers the latter.  Does someone who chooses the latter over the former really care about freedom and individual rights?

Competition and Evolution

A private company, particularly in an industry like broadband with rapid technology change, is constantly subject to getting beaten by a competitor with better technology or a lower cost position.  In the absence of government intervention, the private company has to constantly match competitive technology changes and cost improvements, or die.  Its interesting that the author would choose broadband, because the corpses of literally hundreds of failed broadband companies litter the American landscape.  Broadband has historically been a brutal business, with most companies failing to repay their investment in their infrastructure.  I will confess that many of the major communications players have been slow to move in this area, but in large part it has been government incumbent protection, not market incentives, that have slowed progress.  Wireless broadband providers and equipment producers have to move rapidly -- they have already migrated from proprietary designs to A to B to G and now to N in just five years or so.  A private company without government protection in this environment is faced with two choices:  constantly upgrade, or die.

Now, lets look at municipally-owned broadband company.  Like the private company, it will have to make a large start-up investment to get the infrastructure in place.  Also like the private company, repaying this investment (and thereby avoiding hitting their taxpayers with new charges each month for operations, ala Amtrak) will require putting a lot of volume on the network.  Finally, also like the private company, it will be facing new technologies and new potential competitors almost before the network is complete.  So what does it do?  It could begin to reinvest in the infrastructure, earning the ire of local citizens because it goes back for yet more taxes for the development.  It could cut prices and drive for market share, lengthening the time before it breaks even and eliminates the tax subsidy it will require. 

Or, it has a third option that the private company does not have:  It can use its government authority to block new entrants.  I will tell you right now - the government will use this third option every single time.  Take another large government network business: The Post Office.  The USPS tried like hell to get the government to block Fedex, and almost succeeded.  The government continues to block competition to the USPS for first class local mail.  Heck, the USPS has tried at various times to argue that it should have authority over email and the Internet.  The government blocks new cigarette manufacturers to protect the settlement money it gets from the old-line tobacco companies and it blocks usage of Love Field in Dallas to protect D/FW airport.  Bureaucracies never, ever let themeselves die, and there is no way a municipal broadband business will ever let itself be killed by a competitor - that competitor will be blocked, even if that likely means that local broadband consumers have to stick with higher costs and outdated technologies.

Gee, that sounds great, huh?

Pricing
My sense is that this is what gets the socialists and community ownership guys excited.  You can see from the quotes above, the author sees the world of private enterprise as this enormous price gouging domain, with no accountability on prices.  Though he does not say it explicitly, I am sure if asked he would say that private corporations have no accountability to the public (ie consumers)on pricing, whereas the local municipal government would.  This pricing issue is I think at the heart of his support for public over private ownership:

People know corporations right now have far too much power
and far too much leeway to rip off ordinary citizens - but there is a
feeling that that's "just a fact of life." The Community Ownership
movement shows it doesn't have to be a fact of life, and that there is
an alternative

The obvious response is that private companies have a tremendous accountability on price, from two directions.  First, consumers, if prices are too high, can choose not to buy.  Second, if prices remain "too high" for long, then competitors emerge to undercut them.  Like most socialists or "progressives", the author doesn't understand or trust these mechanisms - he prefers top down rather than bottom-up accountability.

In this sense, he prefers the comfort of the municipal business where elected officials that the consumer votes for set prices, and trusts these elections to provide more accountability than the market  (how ). Even forgetting that government inefficiency will make price savings impossible in such a thin margin business, how can anyone look at Congress or this administration and believe that electoral accountability is stronger than the market.  Do you really feel that you can do more about to affect government set rates like local sales tax rates than you can in response to say rising cell phone rates?  If I don't like my cell phone rate, I can switch plans, switch companies, or switch to other technologies (land lines, VOIP, etc).  If I don't like the sales tax rate, the best I can do is move to New Hampshire.

Conclusion

Wow, this piece really went on for a long time, and certainly far longer than Mr. Sirota's article deserved.  As a final comment on the author's grasp of reality, note this quote, where he refers to:

the out-of-touch confines of the Beltway where free market extremism reigns supreme

LOL.  I would love to find even a little bit of free market extremism inside the Beltway.  And if by free-market extremism he means crony capitalism of the sort I described at the top of the post, well, he should be more careful with his word choice. 

For too long, our side has rolled over and died when it comes to
questions about how to manage the free market so that it works for
ordinary people.

Here is a hint - if you want to participate in the profits of the free market just like the fat cats, try this.

  • Mark Horn

    I wish that I'd had this article a couple of months ago. One of my favorite computer geek sites is http://slashdot.org. But it's difficult to get a handle on what the "average" slashdotter thinks. The average slashdotter is opposed to monopolies (like Microsoft) but likes even bigger monopolies (like the government). The average slashdotter likes things that are free (as in "gratis" as well as "freedom") but wants the goverment to control more than private enterprise.

    Anyway, I would have liked to link to your article when I got into a discussion(1) about municiple broadband. I would have linked to it in hopes that it could explain more clearly than my limited attempts.

    (1) http://slashdot.org/comments.pl?sid=151228&cid=12686838

  • http://www.arizonawatch.com Jack Benway

    Coyote, this is a brilliant post.

    Here in Tucson, the University of Arizona owns a chunk of the broadband spectrum. It doesn't use it, although it leases it to Sprint for its (no longer accepting new customers) wireless broadband service. There is talk among University circles that the UA should begin to offer commercial broadband service using their chunk of the spectrum in order to offset network costs at the UA.

    I can't imagine anything more doomed to fail. Instead of the current situation where they cannot figure out how to juggle the books to maintain campus network infrastructure, they'll be stuck with a money-pit commercial venture costing more than the network infrastructure they hope to bolster. Public universities do not know how to handle money, and they certainly don't understand how to run a profit-oriented business.

  • chad

    I agree with you completely. I am from South Dakota and live in a town with one liquor store, which the city owns. Since it is the only store in town they hike the prices up as much as they want (the prices are consistantly much higher than neighboring towns with multiple liquor stores). The thing I really don't understand is this, the city won't allow another business to sell liquor. How can this be justified, or even legal?