The Folly of Government Picking Winners and Losers

Jeffrey’s hypothetical company designs custom software solutions for businesses across the U.S. His small firm employs 25 people and has gradually grown to a little over $13 million in annual sales.  Margins are tight since Jeffrey has to compete globally on various projects.

Jeffrey also employs some part-time specialists. One of them is Tony, Jeffrey’s old college friend. While Jeffrey is methodical and organized, Tony is the exact opposite. Tony is a brilliant programmer and very creative, yet at the same time, his business management skills are lacking.

Tony is independently designing an online grocery buying and delivery service. Customers shop online and Tony’s completely automated system picks and packs the order and puts it in a delivery truck. The truck driver’s route is automatically planned and all the driver does is unload the shrink-wrapped grocery package at the customer’s door.

Tony went to every bank in a three county area trying to get financing to build a prototype store and make his dream a reality. He even tried to sell Jeffrey a limited partnership. Every bank and private entity turned Tony down.

Tony is tenacious, so Jeffrey wasn’t surprised to see him on the evening news with Governor Scott Walker receiving $4 million in grants and loans from Walker’s Wisconsin Economic Development Corporation (WEDC). Unfortunately, Jeffrey’s smile was short-lived.

In the first two hours after getting to work the next morning, Jeffrey’s four top software writers told him Tony offered them each a 50% increase over their current pay to work for him. Matching Tony’s pay offer will jeopardize Jeffrey’s business. Jeffrey was already paying these employees well over the market pay rate, so he could replace them with other programmers. However, losing all four at once along with their customer relationships would put his business in danger.

Keep residents of this building out of the marketplace!
Keep residents of this building out of the marketplace!

Jeffrey experienced the flip side of a liberal, big government job creation program. He dutifully paid his Wisconsin payroll, sales, property and income taxes for years. Now, Jeffrey is competing against someone subsidized by his taxes.

While Walker and WEDC will get all the press about the new jobs Tony is creating, no one will bother covering Jeffrey’s troubles or be there if he shuts his doors. They won’t cover all the other local long time tax paying businesses that just became slightly less competitive because they are paying more for services and products because of competition from WEDC subsidized businesses.

Other countries, most notably Japan, learned never to let government pick marketplace winners. They have a terrible track record.  Some chosen Japanese companies and industries got sloppy and lazy and found after a few years they couldn’t compete globally without continued government subsidization.  Other emerging industries that didn’t get chosen by the government couldn’t get financing because the government-controlled banks funneled most of their funds to the chosen industries. These not politically connected industries flourished in other countries and contribute to Japan’s loss of competitiveness.

Without government intervention, Jeffrey’s business would have been successful for years. In contrast, businesses needing start-up subsidies from the government invariably need ongoing subsidies to continue operating. To save embarrassment, liberals typically keep the spigot open to companies like Tony’s.

The net of this example is the gain of a business that many commercial lending sources determined had little chance of success and the loss of a viable tax paying business. There will be little if any short-term hiring gains since Tony was hiring employed people. Essentially, government cannibalized a successful business to form one with dubious prospects. A Frugal Ron rule of thumb, every time there is a government intervention in the market, for every winner, there will be at least one loser.

True conservatives recognize corpses of businesses affected by this type of government interventions litter the marketplace. It makes no difference if the subsidies using tax dollars to finance these interventions are from an organization like WEDC or some type of government sponsored venture capital fund. They should be avoided at all costs. The moment government funds are mixed with a private venture fund, irrationality wins.

Republicans relying on organizations like WEDC illustrate with their actions that they don’t believe the private banking sector is capable of making business expansion and continuation decisions. The issue is, banks make rational decisions. Plausibly, the only reason Republicans/liberals had for inventing WEDC is to make irrational lending and grant decisions. WEDC’s record clearly shows they succeeded.

True conservatives want to separate themselves as far as possible from Governor Scott Walker and his liberal and ineffective policies. Unfortunately, Republican seem to follow Walker with the same unquestioning loyalty they gave President George W. Bush while his prolific spending and tax cuts to the wealthy left us in the worst economic quagmire in a generation. True conservatives only hope Republicans will learn to think on their own before Walker has the same long-term negative impact on Wisconsin voters that Bush has on U.S. voters.

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