Long-ago warnings about the moral hazard of federal deposit insurance and credit overextension campaigns by Fannie Mae and Freddie Mac before the 2008 financial crisis were dismissed by those with the power to do anything about the issue. The government-sponsored overleveraging problem had been around for decades, yet Washington, D.C. polcymakers acknowledge little responsibility for the 2008 housing crisis and economic downturn and apparently have learned nothing.
One often hears of the benefits of government action to prevent a new meltdown, but these skate over the elemental government dominance represented by federal influence on the money supply, interest rates, and, for present purposes, moral hazard caused by the GSEs and their contribution to overleveraging. Even today, few politicians want to touch Fannie Mae and Freddie Mac and diminish government’s role even though most mortgages route through those bodies. Yet one can assume that future financial downturns—costs of regulation—will be blamed on the very market that is not in the driver’s seat at all. GSEs unselfconsciously defy the premise of antitrust regulation, since, if mere market power can cause grave harm as so many contend, it surely would be more than doubly unacceptable to merge political and market power into a single entity.
Akin to GSEs and to the distortions of government steering by spending on scientific endeavors—but less explicit than outright government ownership and national planning—is the merging of business with government in public/private partnerships (PPPs). Capable of interrupting emergence of and healthy evolution of institutions of property rights over long horizons, Competitive Enterprise Institute founder Fred L. Smith Jr. tallied some concerns raised by the abuse of or over-reliance on PPPs:
- Log-rolling and pork-barrel politics: “I'll vote for your PPP if you vote for my PPP.”
- Weakened market tests: Resources are devoted to a project not because it benefits the citizenry but rather because it benefits a powerful interest group and/or because a creative referendum entices a majority of voters to support their special interests.
- Weaker Management: Absent market tests, managers are less motivated to find that mix of services and creative array of financing tools to ensure that it proves “profitable” (that is, a rational allocation of capital). Roads, even charter schools, etc. all have suffered here immensely.
- Lack of innovation: No institution in the private world can allow itself to stagnate—the creative forces of destruction will soon make it obsolete. PPP managers face much weaker innovative forces—if things go wrong, they can always appeal to their “public” nature for taxpayer bailouts or direct or indirect protection.
- Corruption: Cronyism abounds in the PPP world.
- Faddism: Markets sometimes go on kicks—the tech boom, for example—but these often soon collapse. Governments go on kicks for many decades—“renewable energy” and “mass transit” being perhaps the best examples but “magnet” investments in downtown malls, stadiums, and convention centers are perhaps even more persistent ones.
- Crowding Out: Capitalism plays a critical role in allocating capital—planting seeds for the future. That is a very difficult task, one made much more difficult by the existence of PPPs.
Where PPPs exist, non-parties involved in both related and unrelated endeavors presumably remain free to compete, but do not get the “advantages” of the government alliance. Uber working with NASA on not-ready-for-prime-time flying taxis may have wound up as one such example.
There exists also the paradox over government subsequently writing its own rules and regulations about endeavors it effectively controls; but as noted, the administrative state is rarely concerned with political failure, even when so thoroughly baked in.
Note: This post is part of a series on “Rule of Flaw and the Costs of Coercion: Charting Undisclosed Burdens of the Administrative State,” and comprises an element of A Brief Outline of Undisclosed Costs of Regulation.