A Major Economic Myth

by Burt on April 4, 2011

An unspoken, but false, assumption in public policy is that if something is good to have, then government ought to be in the business of providing it. In other words, if healthcare is good for people to have, then government ought to provide it, or force others to provide it cheaply. If interstate highways are good to have, then government ought to provide them. If education is good, then government ought to provide it, or subsidize it.

What often happens, however, is that when government gets involved in providing or mandating, services, then incentives change and the services become worse. For example, after the Civil War, most people believed transcontinental railroads were good to have, and so government subsidized the building of the Union Pacific and Central Pacific Railroads. Both railroads chased after federal subsidies, provided poor service, and eventually went bankrupt. Then James J. Hill came along and built the Great Northern Railroad from St. Paul to Seattle with no federal subsidies. He built the road well, and it was the only transcontinental not to go bankrupt.

In 1900, most people believed that airplanes would be good to have, and so the federal government subsidized Samuel Langley to invent and produce a manned flight. Langley crashed two airplanes trying to perfect them, but failed miserably and wasted federal tax dollars. Less than two weeks after his final attempt, the Wright brothers, with their own cash, flew the first airplane at Kitty Hawk, North Carolina. Without federal dollars to create bad habits, the Wright brothers spent and built wisely and correctly.

Federal money often corrupts the political and economic process. Those who receive subsidies play political games rather than creating quality goods and services. Also, those who chase federal dollars often value Senators who can keep the money coming. If the receiver of subsidies fails, then he lobbies for more and more cash to keep trying again and again. The Founders, by contrast, mostly wanted government out of economic life because they recognized that consumers, not politicians, should pick the winners and losers in the open marketplace. Do we trust ourselves to make wise financial decisions with our own money, or do we think politicians can spend our money better?

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