The Political Obsession With Redirecting Private Capital

My new column is up at Forbes, and discusses why politicians, particularly this administration, think they can allocate capital better than the market

The problem is that this top-down override of market capital allocations is almost certain to destroy wealth, because there are at least two problems with it (beyond the obvious liberty and property rights issues).

First, the decisions are being made by, at most, a few hundred government workers.  There is no possible way these workers can ever gather the knowledge and information posessed by millions of private actors making similar investment decisions.  Like monkeys throwing darts, some of the investments will work out, but on average their success rate has to be far lower than the network of individuals in the broader economy.

Second, and probably more important, government decisions-makers have terrible incentives when making these investments.  Seldom, if ever, are government re-allocations of capital made with an expectation of earning a return.  In fact, many of these programs promote themselves explicitly as shifting capital to investments no rational private investor would touch.  These investments are undertaken because they promote some sexy technology, or create jobs among a favored constituency, or even just because they make for a nice bullet point on a politician’s reelection web site.

Obama’s investment of taxpayer money into Solyndra is a great example.  It is clear little due diligence was completed before the loan guarantees to Solyndra were rushed out the door in 2009 in time to meet Energy Secretary Steven Chu’s artificial target date for the first loan of Obama’s green jobs program.  A good, well-timed sound bite on the evening news was more important that the actual details of the investment.

But, in fact, little due dilligence should have been necessary. ....

  • Ted Rado

    Why should anyone be surprised when the government screws something up? They do so almost without exception (hosing, bailouts, renewable energy, etc. ad infinitum).

    The surprising thing is that, after the USSR experience, there are still many who feel that the USG should run everything. What kind of funny cigarets are they smoking?

  • JS

    I think the biggest issue is that there is no way a government agency can really anticipate the buying habits of 300 million people. Whereas people who have private capital, target specific areas for a rate of return on their investment. As noted, the government doesn't ever have to make any money.

  • Arthur Felter

    "Let’s assume that the President’s rightful job was to be venture-capitalist-in-chief. Can you name a single past or current President you would want in that job? Would Barack Obama be in, say, your top 10 million choices for that job?"

    Well, by default he ends up in the top 6 billion, but not by choice.

  • Mark

    What I have pointed out is that the best argument for essentially the free market allocation of capital (and all other resources) is the long neglected idea of "consumer surplus". In a free market, the actors that value a commodity the most will bid the highest price for it. Conceivably, they will also create the highest level of return.

    In an equilibrium, the price of a commodity will settle at a value much less than what the highest bidders would have paid. THis means that many individuals will get more value than the price. This increased level of welfare, "consumer surplus", is maximized by a free market.

    But, with government allocation this is not the case. Then, the allocation of resources is determined by political issues. People with connections or special grievances are put to the front of the line for allocation. Pet projects and outright bribery are more important than the societal returns from allocation.

    This is why planned societies fail. The government may have employed the best experts that had perfect information, but then the government did what governments do.

  • rxc

    It is a sort of religious belief among the planners that the people want to do/buy/save the right thing, but are "prevented" from doing so by the evil marketers and advertisers who confuse them with bad messages. This leads to the theory that with enough education, the people can do the right thing. When the people are bombarded with education, but continue to do the wrong things, then the planners decide to give them a "nudge", either with fiscal carrots or sticks, or by making the bad stuff immoral/fattening/sound like it causes cancer. When the nudges do not work, then regulations get passed limiting the amount of terrible substances the people can consume. This doesn't work, so new laws are passed, then constitutional amendments. None work, because people like to do what people like to do, which is often not in accord with the desires of the planners. People are so damn irrational!

    Eventually we end up with leaders who are willing and able to make the trains run on time...

  • John Cheek

    That sound bite cost $500+ million!!

  • perlhaqr

    Because they're arrogant fucking cunts on a power trip?

  • a_random_guy

    "Does the USA needs to do some infrastructure work?"

    But they mean well. Don't good intentions count for something?

  • a_random_guy

    Huh? That was really weird - that quote is not what I marked and copied. Heck, it doesn't even appear on this page, as far as I can tell...

    Let's try again:

    "Because they're arrogant fucking cunts on a power trip?"

    But they mean well. Don't good intentions count for something?

  • Smock Puppet, Solar Panel Installer for Fools

    >>> But they mean well. Don’t good intentions count for something?

    Let's see... 1, 2, 3, 4, 5...

    Yep, it does count for something.... About one half of one BILLION dollars siphoned out of your pocket, my pocket, and a lot of other pockets into certain other pockets.

    "I either want less corruption, or more chances to participate in it."
    - Ashleigh Brilliant -

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