This week’s rant (Value Line Observer – Jan 22 2010) is a salute to Massachusetts for restoring faith in democracy as an agent to protect the people against the encroachment of government economic power. The same strong convictions that allowed Massachusetts to take on the economic encroachment of a king were on display as the people voted down the encroachment of government management of an additional 15% of the U.S. economy.
I’m not sure I put it exactly this way on the show – I completely ignored my notes – but we get worked up about this because as a capitalist, we like a system that maximizes wealth through the efficient allocation of capital. We like free markets and level playing fields. We like a system where customers vote by buying the best products and services at the best prices, and those that best provide it win the right to stay in business and may make a few bucks as a societal reward, attracting more talent to the invention profession to boot. It’s a system where failure is quickly identified by it’s lack of customers, and those very resources are recycled into productive systems. The honing of this process has brought us to the edge of the envelope on the efficient use of resources, particularly in those industries where customers are allowed to shop for best service and/or best price.
So, the takeover of nearly 20% of the economy by a management team that is unproven and non-profit seeking means that nearly 20% of the economy will earn a return on capital that is below the level that would be earned by business professionals who understood how to maximize the return on that capital. The gap is a very real societal cost even before we examine the likely changes in quality of service. As we compound the lower return on capital for 20 or 30 years, the age at which your young children will be seeking to own the comforts of a civilized life, the wealth per capita available to society will be vastly below what it would otherwise have been. If 20% of the growth in the U.S. capital base earns a 0% return instead of 4%, that shaves 0.8% off of GDP growth. Compounded for 20 years a 2.2% growth rate instead of a 3.0% growth rate leaves per capita GDP 33% lower. That means smaller homes, fewer vacations, less energy use, ironically less medical care, etc.
Val Hughes
