FUNDAMENTAL TRUTH #56: “It’s competition in the private sector that makes life better. Not government regulation.” -Old Pithy

Posted by PITHOCRATES - March 8th, 2011

Government caused the Greatest Recession since the Great Depression

You hear it all the time from the Left.  If it wasn’t for all those government regulations those on the Right bitch about we wouldn’t have safe food, safe medication, safe transportation, safe merchandise, fair prices, a clean environment, quality education, etc.  It’s rather amazing to hear people in government say this.  And people on the Left say this.  Because people are people.  And people regulate people.  So why are some people better than other people?  Just because they say they are?  I find that a bit specious.

Government caused the greatest recession since the Great Depression.  It was their economic policies that put people into houses they couldn’t afford.  It was Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac that enabled the approval of very risky mortgages by buying them from the lenders.  It was the GSEs that had Wall Street create vehicles to sell these risky mortgages as high yield, low risk investments (i.e., derivatives).  It was Congress that refused to stop this risky behavior of the GSEs because Congress members were getting sweetheart mortgage deals and campaign contributions.  And it was Congress that bailed out the GSEs with our tax dollars after their dirty politics crashed the economy.  If you go down the chain of events you see one constant behind every step in the process that gave us the Great Recession.  Government, government, government.  And yet we are to trust government people every time over the private sector people.

If you remove government from the mortgage picture, though, it’s a different story.  Instead of discrimination it was just poor credit and insufficient earnings that denied mortgages for some blacks, Hispanics, single mothers, etc.  And these people wouldn’t have been in houses they couldn’t afford.  Lenders would have had far fewer risky mortgages on their books.  The GSEs would have bought far fewer risky mortgages.   Wall Street wouldn’t have spread the subprime mortgage contagion worldwide by selling boatloads of their complex derivatives.  There would have been no Great Recession.  There would be no double digit unemployment (U6 – a truer unemployment rate than the ‘official’ U3) today.  And all of this by just removing government from the beginning of this process.  And yet we are to trust government people every time over the private sector people.

A Business must please the Consumer to Survive

Let’s look at another example.  Let’s take food.  The Left say that if it wasn’t government regulation our food would be unsafe.  So let’s imagine a world where there is no government regulation.  And only two meat packing plants.  A devious, archetypical corporate villain (as the Left believes runs all corporations) runs one plant.  Let’s call him Mr. Devious.  A true free market capitalist runs the other.  Mr. Devious reinvests no money into the plant.  Doesn’t even clean it.  Has a rat infestation.  Uses rat poison to control the rat infestation.  Doesn’t care.  And sends out tainted meat that kills hundreds of people.  The true free market capitalist keeps reinvesting in his plant.  Keeps it clean.  Has no rat infestation.  And strives to put out the best quality product.  It’s not tainted and people eat it without dying.

Now suppose you’re putting together your shopping list.  You have meat on your list.  And on the television news is a story about still more deaths that are traced back to Mr. Devious’ plant.  Now, in our imaginary world, there is no government.  No government inspectors to step in to inspect Mr. Devious’ plant.  He broke no law and did not fail to maintain any regulatory standards.  No one files any legal actions against Mr. Devious because he broke no law.  Now tell me, where are you going to go to buy your meat?  Well, if you’re sane, you’re going to make damn sure the meat you buy didn’t come from Mr. Devious’ plant. 

Even in a world that has no government regulation, a Mr. Devious cannot exist.  Because there’s competition.  And the last thing a true free market capitalist wants is bad publicity.  If consumers have an unfavorable view of your company they’ll shop elsewhere.  And if you’re killing people with the food you sell, you couldn’t make a more unfavorable view of your company in the eyes of consumers.  So they won’t be buying what you’re selling.  Ever.  But guess where they will be buying from?  That’s right.  The business that puts out the best quality.  And the best price, of course.  In other words, the one that best pleases the consumer.

Competition Makes Everything Better

Hey, you’re thinking, that makes sense.  So maybe the big corporate giants care about us.  If only for their greed.  Well, greed is a powerful motivator.  You see, a profit is an incentive to do good.  And pleasing consumers it the key to profitability.  So you do everything within your power to please as many consumers as possible.  Before another business pleases them better.  We call this tug of war in the market place competition.  And you win this game by pleasing consumers better than your competitors do.  Because competition makes everything better.

Now think about the things you hate to do.  Deal with the cable company.  A utility.  Getting your driver’s license renewed.  Getting a building permit.  Getting your tax assessment reduced because your house isn’t worth as much as your city says it is.  Filling out your income taxes.  Going through airport security.  Etc.  And what do all of these things have in common?  Little to no competition (although cable companies have competition today but making a change is a pain in the you know what).  There is little need to please consumers.  And it shows.  Customer service isn’t the greatest.  And the processes are often long, complex and exasperating.  Why?  Because they can be.  Where else are we going to go?

These things also have another thing in common.  Government heavily regulates them.  Or they’re simply government itself.  Government people.  Those people we are always to side with over the private sector.  And many of us do.  Despite our not liking to do any of the things we have to do with them.

Competition can even Clean the Environment

Okay, but what about the environment?  There’s no profit in spending more money to keep the environment clean.  Surely that’s something only government regulation can do.  Well, let me ask you something.  Where are you more likely to litter?  In your backyard?  Or in the National Mall after a rally?  The National Mall, yes?  Because we take care of what we own. 

Yes, there have been polluters in the past.  And, yes, government regulations have cleaned them up.  But back when they were polluting, few cared.  Because it was normal.  I mean, once upon a time, human feces used to cover our sidewalks and streets.  And that was normal.  It isn’t anymore.  So we don’t do it anymore.  This is more a process of civilization.  A company today that leeches toxic chemicals into the ground water that kills people who drink well water is going to get a lot of bad PR (public relations, i.e., favorable publicity).  And we know what bad PR does to private companies.  So they are going to try everything in their power to not leech toxic chemicals into the ground water so they can avoid the bad PR.  Before we knew the affect of some of these chemicals, though, some companies did unknowingly kill people.  Now that we know better, they handle their chemicals differently.  In a way that will help to keep consumers as customers.  Not push them away.

BP and Exxon both suffered in the eyes of the consumer after their spills.  And a lot of consumers refused to buy their gasoline anymore.  Not only that, the BP spill shut down all offshore oil drilling in US waters.   At great cost millions of dollars of equipment had to be shipped elsewhere where they could drill.  They would have made more profits without the spill and the bad PR.  So they have a very strong incentive to prevent these environmental disasters from happening.  And considering the amount of oil they pump up from these offshore wells, their environmental record is pretty good.

Companies even look at the little things that add up.  McDonalds used to sell their hamburgers in hard, foam cartons.  They don’t anymore.  Because they felt they could please more consumers by being more environmentally friendly.  Starbucks sells their hot coffee in paper cups to be environmentally friendly.  And the sleeves they use so you can hold those hot cups of coffee contain recycled material.  You can still use foam cups by law.  But they choose not to.  To please their consumers.  So they can keep them as customers.  And be more profitable.

Without Competition Little Changes

Corporations survive on profits.  Maintaining profitability means pleasing consumers.  When something bad happens they have a powerful incentive to act fast.  Before the problem spirals out of control causing bad PR.  Making consumers go elsewhere.  They will act faster than any government bureaucracy in identifying and correcting the problem.  To limit their damages.  Because the more damage they cause the harder it will be to regain the consumers’ confidence.  And lost consumer confidence equals fewer profits in the private sector.

It’s a little different with government.  Without competition little changes.  Fannie Mae and Freddie Mac are still here.  They may go away but there is talk about replacing them with something similar.  To make sure the same housing policies that caused the Great Recession will continue.  To make sure that some people who can’t afford a house can buy a house.  And if it all blows up again, they will just pass the cost onto the taxpayers.  Again.

And yet we are to trust government people every time over the private sector people.


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