The Chosen Road To Nowhere

Posted by Jeff Carter
on January 28th, 2013

George Stigler (Photo credit: Wikipedia)

Whenever a business feels like it has to hire a lobbyist to work with the government, it’s doomed. At all costs, it should try and ignore the government and work around anything that the government sets up to constrain it.

Case and point is Silicon Valley. Our high tech industry is one of our most dynamic. It’s a meritocracy. Capital flows in and around it. The invisible hand works pretty well. It’s highly competitive. But, they have succumbed to the allure of lobbying.

No matter which political party you caucus with, as soon as you show any interest, they get their meathooks in you. All they want is your money in return for providing you with services rendered. Many times, you actually don’t need those services rendered.

From the above linked column,

In 1999, economist Milton Friedman issued a warning to technology executives at a Cato Institute conference: “Is it really in the self-interest of Silicon Valley to set the government on Microsoft? Your industry, the computer industry, moves so much more rapidly than the legal process that by the time this suit is over, who knows what the shape of the industry will be? Never mind the fact that the human energy and the money that will be spent in hiring my fellow economists, as well as in other ways, would be much more productively employed in improving your products. It’s a waste!”

He predicted: “You will rue the day when you called in the government. From now on, the computer industry, which has been very fortunate in that it has been relatively free of government intrusion, will experience a continuous increase in government regulation. Antitrust very quickly becomes regulation. Here again is a case that seems to me to illustrate the suicide impulse of the business community.”

The reason Friedman knew he would be right was settled years before. His pal George Stigler had proven a theory on government regulation. The Stigler Center exists to this day, studying economics and its interaction with government.

Instead of innovating, many tech firms are diverting resources to regulatory capture. Regulatory capture occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for firms to produce negative externalities. The agencies are called “captured agencies”.

Regulatory capture leads to regulatory arbitrage. Just see how the bankers operate. Look at agriculture.

It can be as blatant as hiring lobbyists, or it can be small ball with local governments. Twitter and other Silicon Valley firms just made a deal with San Francisco city government to donate to charity, promote tweets and do other things in exchange for reduced taxes. Once the government can hold you hostage, where does it stop? The next time they need something, they will go to the well and ask. If they don’t get it, they will force the firm to pay somehow, some way.

Governments chew up private productive resources that could be better served doing something else. Sometimes it’s better to look at the opportunity cost of government rather than the actual cost. The opportunity cost is usually a lot higher. That’s what Stigler did.

Politicians aren’t concerned about anything more than money, and using that money to increase their power base. Bureaucracies set up by those politicians under the guise of “concern for the people”, aren’t concerned about the people necessarily. They are all about regulating and increasing their breadth and reach.

That’s why it makes a lot of sense to ditch the “scalpel cuts” on government and attack it with a meat cleaver. The talking heads that are against cutting government with a meat cleaver use fear as the motivation behind their statements. ”What about (fill in the blank)? How will they get (fill in the blank)?”.

This idea isn’t party centric, it’s political party agnostic. When it comes to using government to extend their power, currently both parties trend the same direction. If one were to reverse course, then we would have an interesting debate on our hands.

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