The private sector almost always outperforms bureaucrats investing with the public's money
(Editor’s note: The following is an edited version of commentary that was originally posted at burtfolsom.com the website of Burton Folsom Jr., a history professor at Hillsdale College and a member of the Mackinac Center for Public Policy's Board of Scholars. It was written by Anita Folsom.)
Failed government subsidies have existed in U.S. history from George Washington to Barack Obama.
But what's especially remarkable about the stream of government aid — subsidies to the fur trade, steamships, railroads, airplanes, and even ethanol today — is that private citizens, with no federal funds, almost always outperform the men whom the government endows with large chunks of cash.
In the first years of the American Republic, John Jacob Astor owned a fur company that defeated a government-funded rival — supported by George Washington himself. Astor actively traded with Indians instead of trying to tell them what they wanted and how to live.
With steamships and transcontinental railroads, the government subsidized companies that either went broke or were so politically corrupt that the public demanded reform. On the other hand, the most successful companies in steamships and transcontinental railroads were both privately owned and made regular profits in spite of the vast amounts of federal aid given to their competitors.
Another example is the Wright Brothers. Wilbur and Orville Wright used $2,000 of their own money to design and build their airplane and successfully flew the first manned flight. At the same time the government threw money at a government bureaucrat, Samuel Langley, whose two failed attempts at flight both crashed in the Potomac River.
After the Wright brothers succeeded, Wilbur Wright said, "We have not thought of asking financial assistance from the government. We propose to sell the results of experiments finished at our own expense." Reporting on the Langley fiasco, the San Francisco Chronicle, said, "The destruction of Langley's machine should put an end to Congressional appropriations of any kind in every field of experiments which properly belongs to private enterprise."
But it didn't. In fact, government subsidies for corporations have increased dramatically in the last 100 years.
Currently, one corporate giant in the race for government money is General Electric. GE's chairman and CEO, Jeffrey Immelt, has led the charge to secure more federal funds for any project connected to green energy. As we reported in our new book, Uncle Sam Can't Count, "GE is the leading American producer of wind turbines, and Immelt has actively supported President Obama, serving in his administration as the jobs czar. GE has the biggest lobbying budget of any corporation in America, and the company gave more to Obama in 2008 than any presidential candidate in its history."
From 2000-2012, the U.S. spent $3,000 a second every second of that 12-year period on government subsidies — most of which, like Solyndra, were a huge waste.
Why does federal aid seem to have a reverse Midas touch? Simply put, federal officials don't have the same abilities or incentives as entrepreneurs. In addition, federal control always produces political control of some kind. What is best for politicians is not often what works in the marketplace. Politicians want to win votes, and they can do so by giving targeted CEOs benefits while dispersing costs to others.
The fact that government subsidies have failed from the start, and that they continue to fail, should alarm us when we consider the astonishing increases in federal aid given to most of the largest corporations in America today.
The Constitution, in Article One, Section Eight, limits the power of government in economic development. If we want to preserve our nation's financial integrity for the 21st century, we need to end government subsidies and encourage the private sector to provide the goods and services that will keep our country prosperous.
Burton W. Folsom Jr. and Anita Folsom are the authors of, Uncle Sam Can't Count: A History of Failed Government Investments, from Beaver Pelts to Green Energy, (HarperCollins, 2014).