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ISLANDS OF SOCIALISM: THE FOLLIES OF GOVERNMENT ENTERPRISE”

There are degrees of socialism just as there are degrees of capitalism. Even the Soviet Union was not 100 percent socialist because it permitted a small percentage of farmland to be privately owned (the Russian Communists understood that without private property in agriculture they could never produce enough food to feed their population). There were also pervasive black markets or an “underground economy” in the Soviet Union, small islands of capitalism that allowed many to live above subsistence levels.

Today, every democratic country has islands of socialism in a sea of capitalism—government-run enterprises like the U.S. Postal Service, state and local government public works departments, police, firefighters, garbage collection, schools, electric, natural gas, and water utilities, transportation services, financial institutions like Fannie Mae, and dozens more. Indeed, many functions that are routinely performed by private businesses are also done by government-run enterprises.

Decades of research in economics (and simple experience) show that government-run enterprises are, as a rule, vastly more inefficient, and offer products or services of far worse quality than private businesses.¹ Economists have a “Bureaucratic Rule of Two,” which holds that the per-unit cost of a government service will be on average twice as high as a comparable service offered in the competitive private sector.²

In a free market economy, businesses that do a good job of giving the people what they want at competitive prices are rewarded with profits. If they fail at that task they are penalized with losses or bankruptcy. This is known as the “survivor principle”: businesses that fail to satisfy enough customers will not survive.

No such mechanism exists in government enterprises, for there are no profit-and-loss statements, in an accounting sense, there are only budgets.

In the private sector, profits reveal what value a business has contributed to the economy or to society. For instance, if a business takes $10,000 worth of resources and creates products for which people pay $100,000, then it has created $90,000 worth of value to society. Government enterprises, by contrast, can actually destroy value by using resources in a less than efficient or profitable way.

Indeed, in government, the worse a government agency performs, the more money it can claim from a legislature, city council, or county commission. If state-run schools fail to educate children, then obviously they need more money (even if government-run schools often already spend several times more per student than private schools do). If the welfare state fails to reduce, or actually increases, poverty then obviously, say the bureaucrats, we need to expand welfare programs even further. The Obama administration actually bragged about expanding food stamp rolls and claimed they were good for the economy.³

The socialist enterprises of federal, state, and local governments are paid for by taxpayer subsidies. Failure to pay taxes, or to pay less than what the government demands, leads to heavy fines, government confiscation of property, and/or imprisonment.

In the private sector, by contrast, there is no forcible payment, and businessmen, investing in their own businesses, have to create and market products and services that consumers want and will buy of their own free will (which also means at a reasonable price).

Government bureaucrats, at best, monopolize services that were once provided by the private sector and, in doing so, increase the cost and reduce the quality. Often they do worse than that, creating taxpayer-financed boondoggles for which there was never any real consumer demand in the first place but mere bureaucratic whim.

All of this is why the words “bureaucrat” and “bureaucratic” have taken on such negative connotations. No one likes to be called a bureaucrat, but that is what government employees are, with the well-earned reputation of having “all the efficiency of the Post Office and all the compassion of the IRS.”

We are told that when government provides a service it is free, but of course nothing is free, because someone has to pay all the government employees, their overhead, and everything else that government does, buys, or appropriates. That “someone” is of course the taxpayers. Whenever socialist-minded politicians speak of “free” services, what they really mean is that the cost of the service will be hidden in taxes.

Unfortunately, hiding costs this way often works—at least for politicians, who can claim to have delivered services, but to the detriment of the public that is supposed to be served. When people are fooled into thinking something is free, they tend to want more of it. The result is shortages, overcrowding, and rationing.⁴ You often hear about healthcare being rationed in socialist healthcare systems. But rationing can also be seen in situations like the periodic droughts in California. Droughts, of course, are a natural phenomenon, but governments often make them worse when government bureaucrats set water prices and allocate water usage. In 2015, California Governor Jerry Brown ordered city and county governments to enforce a reduction in water usage by 25 percent. Failure to do so would result in a $10,000 per day fine.⁵ This comes from a state that during the concurrent drought pumped several million acre feet of fresh water into the ocean in pursuit of government-mandated environmental goals.⁶

Politicians sometimes try to reassure a skeptical public by saying that a state-controlled enterprise will be run “on a business-like basis.”⁷ But no government function can ever be run like a real business, because there is no profit and loss.

Unlike private businesses, government enterprises, supported by the taxpayers, can last for generations providing shoddy services at extremely high costs. More than that, their tax dollar subsidies (and government regulation) can help them cripple or eliminate private-sector competition, which is one reason why the government has so many monopolies or near-monopolies. It doesn’t matter if your own kids go to a private school; you still have to pay taxes for the public schools—and for the Department of Housing and Urban Development, government-run utilities, and everything else government does.

Bureaucrats do not advance in their careers through entrepreneurship, innovation, improving quality, and lowering costs. Their success is based, as economist Murray Rothbard pointed out, on political skills. The free market “promotes and rewards the skills of production and voluntary cooperation; government enterprise promotes the skills of mass coercion and bureaucratic submission.”⁸

With its access to the taxpayer’s purse and, at the federal level, its printing press known as “the Fed,” government is able to pay its employees significantly more than comparable private-sector employees. According to the U.S. Bureau of Labor Statistics, state and local government employees earn 35 percent higher wages and 69 percent greater benefits than private industry employees.⁹ In addition, they typically have far better job security as well; civil service regulations and the power of public employee unions make it difficult if not virtually impossible in some states to fire public employees. Even during the “Great Recession” of 2008, in many states private sector employment plummeted while government employment expanded.¹⁰ Government thus provides perverse incentives for workers to leave the productive, wealth-creating private sector for the wealth-absorbing, taxpayer-funded public sector.

COST-MAXIMIZING GOVERNMENT ENTERPRISES

To be competitive, private companies have to minimize costs and continually innovate, creating new and better products. In this way, they maximize profits; and higher profits mean higher salaries, promotions, and success. Government bureaucrats don’t deal with profits, they deal with budgets; and the goal is to expand the budget.¹¹

Even if a government enterprise is managed by purely well-meaning, ethical bureaucrats, it still needs a bigger budget to do more “good.” Every government bureaucrat is therefore a relentless lobbyist for higher taxes and more money for his or her government agency. He is, in other words, an inveterate cost maximizer. The fact that most government enterprises have little or no competition means that they also suffer from managerial laziness and ineptitude compared to private businesses that face competition.

Government agencies are notorious not only for wild spending binges at the end of every budget year (in order to justify more funding) and for over-staffing (a great way to spend money year after year), but for promoting incompetent government employees to another agency or division in a different location because of the near impossibility of firing them. If you’ve ever wondered why many government agencies have warehouses full of spare furniture, or why there are always twelve road repairmen standing around while four others are working, or why so many teachers grumble about the extraordinary number of overpaid school administrators, this is why. In government, waste and inefficiency is good, failure is success, and incompetence is rewarded.

For politicians, taxpayer-funded programs are benefits and ways of buying votes. Likewise, expanding the number of taxpayer-funded federal, state, and local employees is a form of patronage. Politicians who support public employee unions get public employee votes (and union funding).

But the general public would be a lot better off—materially and otherwise—if government shrank and more people lived not off of the taxpayer’s dime, but off of their own efforts to create better products and services that people will actually pay for of their own free will. That’s how real economic, and human, progress is made.