David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.
An anonymous reader emailed me recently, criticizing my support for government involvement in the marketplace. "Don't you understand," he said, "that the private sector always does things better and more efficiently than the government can?" This idea is taken as an article of faith by many. But it needs to be examined closely. It contains a grain of truth but also a serious misconception.
This reader's assertion combines two different ideas. The first idea is that government should not engage in business in the same way that private companies do. This is largely correct, but there are some exceptions. The second assertion is that government has no role managing markets and ensuring their efficiency. This is almost completely untrue and needs to be challenged. Competition can't work effectively without a well-structured and well-managed marketplace. And government is the only entity that can maintain the marketplace in good condition.
The relationship between companies and the marketplace is a lot like the relationship of sports teams and the context of play, which includes the field, the rules of the game, and the rules of the league. Football wouldn't be worth watching if the field was not maintained in good condition, if the rules of the game weren't clear, if the rules weren't enforced uniformly by the refs, and if league rules like free agency and salary caps didn't keep the game competitive. A few teams from big cities would take control, tie up key talent, and then would seek to bribe the refs and rewrite the rules to ensure perpetual dominance.
In our economy, individual companies are the teams on the field, but government controls the context in which play occurs. Government maintains the marketplace, and no other entity has the power to do this. The scope of government in managing the markets includes the following:
- A solid legal foundation, for example patents, contracts, and property rights
- A stable currency
- National security, so business does not get disrupted by foreign threats
- Stable and orderly conditions in capital and labor markets
- Efficient infrastructure: roads, trains, airports etc.
- Preservation of competition
- Management of externalities—for example, catch limits on a fishery
Let's return to the first question: Are there any conditions under which government should put a team on the field?
There is rarely value in having government field its own team in well-functioning competitive markets. We don't need or want a government enterprise making toaster ovens. However in some cases, market forces have failed to address needs, and in these cases government entities operate with greater efficiency and effectiveness than private sector firms. For example, Medicare operates more efficiently than the private system when it comes to covering the healthcare needs of older Americans. When the United States established the Medicare Advantage program to promote private sector competition, it became clear that private corporations would need a subsidy of $15 billion per year in order to compete with the allegedly-inefficient government plan. Private sector providers simply could not match Medicare's efficiency even though Medicare is actually legally prohibited from negotiating drug prices with pharmaceutical manufacturers while private corporations face no such restriction.
The much maligned post office offers another example. Even though everyone loves to complain about it, the fact remains that the U.S. Postal Service can send a letter overnight or in two to three days for less money than Fedex. And the post office's edge prevails despite the numerous obstacles imposed by legislators. For example, the post office is required by law to prefund its pensions to an extent unprecedented in private industry. And Congress repeatedly blocks the post office from closing redundant post offices and subcontracting the work to local merchants.
Often the private sector can outperform government. Sometimes the government can outperform the private sector. Private isn't always better. What drives efficiency and effectiveness is whether real competition exists, and if not, how the operators are measured and incented. In parts of the U.S. economy with little competition, the private sector has shown remarkably poor performance. For example in broadband internet, which is a near-monopoly, broadband services cost much more and provide much less capacity in the United States than in any other developed country. Likewise in healthcare, many local markets face near-monopoly conditions. With no effective competition, and minimal negotiating power on the part of payers and patients, healthcare costs in the United States have risen far faster than in other developed countries.
In a vigorous and open marketplace, competition does a remarkably good job of spurring companies to innovate and become more efficient. But what is often true is not always true, and we need to heed the difference. Private sector companies can be remarkably sluggish and inefficient when markets are not competitive and companies have won government subsidies and protection. Such is the case with banks that are too big to fail (and bankers who are too big to jail.) In these cases a firm government presence is needed to restructure markets so that competition prevails. The invisible hand can't work without it.
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