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The Disaster of Government-Run Businesses, Part 2


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In the 1870s, the Japanese had many government-run businesses — among them, mining, shipbuilding, railways, and silk production. According to economic historians Johannes Hirschmeier and Tsunehiko Yui, they “were a heavy burden on government finance, and on the whole were running in the red.” The government couldn’t even make money with silk production, something the Japanese had a lot of experience with. Hirschmeier and Yui wrote,

The much promoted Tomioka Filiature was a failure as far as management was concerned. In spite of the good export market for raw silk, the administrators prevented visitors from entering lest their inefficiency be exposed.

In 1881, guided by finance minister Matsukata Masayoshi, the government began phasing out subsidies and selling its mismanaged businesses for whatever they would fetch, which often wasn’t much. For example, in 1885 the entrepreneur Furukawa Ichibei paid 338,000 yen for the Ani Copper Mines, where the government had spent 1.7 million yen. The government had spent 2.4 million yen at the Kamaishi iron mine, but the results were so bad that it was shut down. In 1887 the entrepreneur Tanaka Chobei bought the abandoned property for 12,600 yen.

Private Japanese entrepreneurs outperformed subsidized, government-run businesses. For example, in 1870 Yataro Iwasaki founded Mitsubishi, a shipping company that proved to be more efficient and less expensive than the government-run Nippon Postal Steamship Company. “While the Postal Steamship Company makes use of government protection and is boastful and overbearing,” Iwasaki declared, “we of the Mitsubishi strengthen our internal controls and go out of the way to please the people.” Nippon Postal Steamship Company subsequently went out of business. As a result, those who used shipping services — not the taxpayers — paid for them and got better service. Japan’s rise as an industrial power began as it opened up, sold off government-run businesses, and phased out subsidies.

British socialism

Although the Allies won World War II, socialists came to power throughout Western Europe and promoted nationalization of major industries. In Britain, for instance, the Labour Party won the July 1945 elections. Prime Minister Clement Atlee told the House of Commons, “In matters of economic planning, we agree with Soviet Russia.”

Coal mines — about 800 — were nationalized first. Labourites insisted that only government could make the mines bigger and more modern. This, it was presumed, would result in greater efficiency. But efficiency never happened. The new National Coal Board drove out private managers and technical people, which delighted the coal miners. The National Union of Mineworkers gained big wage concessions, and there were coal shortages. The National Coal Board blamed consumers. For instance, its 1953 report stated that “changes in consumption are required to overcome the shortage of coal.” The British government lavished more capital on the coal mines than any other nationalized industry, but because officials didn’t need to perform to get their hands on taxpayers’ money, it was squandered. During the 1950s, absenteeism went up, miners were given more time off, and the cost of producing coal soared. Thousands more unionized coal miners were hired, and their pay increased, but coal output went down, and coal shortages persisted.

In its most ambitious effort, Parliament established the British Transport Commission and gave it responsibility for transportation by railroads, trucks, highways, and water. This involved nationalizing some 3,800 businesses. Here again, the assumption was that by combining all these different operations into a big monopoly, it would become more efficient. But nobody could agree on exactly how everything was to be combined, and the bigger the monopoly became, the harder it was to manage. The British Transport Commission established a central bureaucracy that was supposed to be dynamic, but that turned out to be impossible. The leading lights of British nationalization didn’t have any idea how they would find capital to upgrade the facilities, how they would operate the services to achieve greater efficiency, or how they would improve labor relations. Meanwhile, unionized employees won generous pay raises, none of them could be fired, and deficits of the various government-run businesses skyrocketed.

Nationalizations of electricity (about 550 businesses), gas (about 1,000 businesses), and steel (217 businesses) caused more problems. Incredibly, many people imagined that the best bet would be more government intervention. Atlee introduced forced labor. By the end of 1947, as University of Manchester economist John Jewkes noted,

No man between the ages of 18 and 50 years and no woman between the ages of 18 and 40 years could change his or her occupation at will. Every such change had to be registered at the Employment Exchange, and the Minister of Labour had the power to direct workers changing their jobs to the employment he considered best in the national interest.

Despite all the harm done, it was politically almost impossible to get rid of government-run businesses because they were aggressively defended by labor unions, and people had lived so long with big government that they couldn’t imagine how the economy would function without it. In 1950, the Labour Party wanted more government-run businesses. The Liberal Party wanted to keep some and sell off others. Conservatives didn’t want any more government-run businesses, but they were concerned that selling them off might be risky. They privatized only the steel and trucking industries. The economy deteriorated for three more decades until the “British disease” (strikes, taxes, inflation, stagnation) became bad enough that there was public support for unloading government-run businesses and liberating the private sector.

The Soviet Union and the United States

If there were any doubt about the folly of government-run businesses, surely the experience of the Soviet Union ought to have resolved it. Consider the Samarkand Refrigerator Factory, which received many awards for meeting its Five-Year Plan production quotas. Paul Craig Roberts and Karen LaFollette reported the refrigerators

were of such dismal quality that most were eventually sent back to the plant — this rejection was in a country where consumers pounce on goods of even sub-minimal quality. More surprising: every year that factory has asked for and received a higher level of subsidy from the government to produce junk refrigerators nobody wants.

This case was typical. Roberts and LaFollette noted that

new roads collapse, heat pipelines burst in cold weather, floors in new houses look like washing boards, and TVs spontaneously catch fire. Western visitors have reported the astonishing sight of nets extended between the first and second stories of new buildings to catch debris falling from above.

Since the economy had nothing but government-run businesses, it was no wonder the Soviet Union collapsed and vanished from the map.

Meanwhile, American taxpayers are stuck with many money-losing government-run businesses. Next year, for instance, Amtrak will mark its 40th consecutive year of losses. Amtrak was started in 1970 to save the jobs of unionized employees whose featherbedding and gold-plated benefits had done much to drive passenger railroads into bankruptcy.

Taxpayers are stuck, too, with the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), government-sponsored enterprises that had special privileges, including a line of credit at the U.S. Treasury. By channeling several trillion dollars into subprime mortgages, Fannie and Freddie did more than anyone else to cause the housing bubble that burst in 2008. Thus far, the government has committed American taxpayers to cover as much as $400 billion of Fannie’s and Freddie’s losses.

The most costly government-run business is Medicare “insurance” which has an estimated $36 trillion of unfunded liabilities. That’s how much would have to go into an interest-bearing account now to generate enough income, on top of future Medicare payroll taxes, to cover benefits seniors have been promised in perpetuity. Medicare is generating enormous pressure for higher taxes, and it seems certain there will be an epic political battle between the rapidly growing numbers of seniors who demand their Medicare benefits and younger Americans who are staggering under the burden of ever higher Medicare payroll taxes. It’s possible that when enough younger taxpayers adopt so many tax-avoidance strategies that tax revenues fall short, the government will churn out stupendous amounts of paper money for paying Medicare as well as Social Security benefits, and America will be devastated by runaway inflation.

What to say the next time somebody has a bright idea for another government-run business? Never again!

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    Jim Powell is policy advisor to the Future of Freedom Foundation and a senior fellow at the Cato Institute. He is the author of "FDR’s Folly", "Bully Boy", "Wilson’s War", "Greatest Emancipations", "The Triumph of Liberty" and other books.