Speaker's job plan a waste of money
Thomas M. Keane Jr.
House Speaker Thomas Finneran's proposal
for a $110 million fund of loans and grants for "rapidly developing
emerging technologies" sounds suspiciously like a state version of MITI.
MITI - postwar Japan's Ministry of International Trade and
Industry - was a sensation in public policy circles some time ago, one that
posed a fundamental challenge to U.S. notions of how best to organize an
economy. Rather than wasteful, freewheeling entrepreneurship, MITI tightly
organized management of the Japanese economy, using government resources to
direct investment into high- growth and high-profit fields. The result, as one
book had it, was Japan Inc.
And it scared the hell out of
Americans. During the 1970s and 1980s, "Made in
Indeed, until the surge in
Now, with
To be sure, Finneran is hardly proposing anything as
sweeping as MITI. In the context of a $23 billion budget, his fund is small, a
tentative experiment.
But at its heart, Finneran's notion
is about the same thing: The government makes investment decisions. And implicit in it are two related ideas. One is that
ordinary markets are doing a bad job of investing. The second is that
government can do it better.
Both are wrong.
There are, as far as I am aware, no credible claims that
capital markets aren't working. Stock markets, venture capitalists, banks and angel investors continue to look for and fund good
ideas. "Rapidly developing emerging technologies" continue to get
money - indeed, they're an investor's Holy Grail.
So why, then, is the business community so thrilled with
Finneran's proposals?
Well, you would be too if someone offered to give you $110
million.
Being pro-business is not the same as being pro-economic
growth or pro-capitalist. Businesses are as greedy as anyone else,
and they love it when government steps in to help them, be it with tariffs,
targeted tax cuts or financial help.
Almost inevitably, however, that interference comes at an
overall cost to the economy. Government involvement distorts the level playing
field that is the underpinning of efficient markets.
Moreover, government makes a poor investor. Government
(quite properly) has different concerns from investors. Business people care
about the bottom line. Government cares about broad issues of fairness and
equity.
Just take Finneran's stated purpose for his plan: Create
more jobs. Then suppose two hypothetical investments. One is Widget Company A
that needs $10 million to open a plant in
Another, Company B, wants $10 million to help it develop
equipment that will allow it to make the same amount of widgets as Company A,
but with only 100 workers.
Which one does the state fund? Company A, of course. The
job- destroying Company B, measured by Finneran's "create more jobs"
criterion, wouldn't make the cut.
Of course, it's likely someone else would eventually fund
Company B. Then, with its vastly more efficient manufacturing, it would drive
Company A out of business. And as cruel as it may sound,
that's better for everyone: By increasing productivity, Company B ultimately
increases overall wealth, something Company A doesn't do.
Still, comes the argument, how
about MITI? Wasn't its success proof that these concerns about government
investing are only theoretical, not real?
Hardly. In fact, much of MITI's
success was an illusion. Analysis by Bob Johnstone in the 1998 book "We
Were Burning" argued that Japan's success occurred despite, not because
of, government intervention. Japanese entrepreneurs were cleverer and more
agile, able to take advantage of an American economy that was
dominated by complacent oligopolies focused on short-term results.
Nor was MITI very smart. The agency, for example, turned
down the motorcycle company Honda when it proposed moving into automobile
manufacturing. Luckily for Honda, it ignored MITI,
with results that can be seen on roadways all across
And
Talk back to Tom Keane at