Government-run firms and services hurt the economy


ITHACA, N.Y. -- The U.S. government is causing economic harm through its ownership or support of firms and services that compete with private enterprise, such as the U.S. Post Office, Fannie Mae and Amtrak, says a new book edited by a Cornell University professor.

The government-affiliated and quasi-government services benefit from competitive advantages over private firms that foster a wide range of potentially harmful effects to the economy and taxpayers, says the book, Competing with the Government: Anticompetitive Behavior and Public Enterprises (Hoover Institution Press, 2004). The editor and author of two of the four chapters is R. Richard Geddes, an associate professor of policy analysis and management at Cornell. The other chapter authors are David E. M. Sappington of the University of Florida and National Bureau of Economic Research (NBER) and J. Gregory Sidak and Peter J. Wallison, both of the American Enterprise Institute.

"Government firms are often endowed with certain privileges and immunities not enjoyed by private rivals," says Geddes, who will begin a year's service as a senior economist on the president's Council of Economic Advisers on Aug. 1. "Where a government firm competes with a private firm, it can use those advantages to diminish or eliminate a rival not enjoying the same benefits."

The book is intended for the layperson, policymakers, lobbyists, lawyers and business people. In it, the authors, both economists and lawyers, explore several important questions:

  • Should the government operate where private business is actively and efficiently providing goods or services?

  • If a private enterprise expands its activities, does government have a duty to reduce its activities in the same arena?

  • If government and industry compete, should government firms be able to use their array of privileges and immunities to outbid rivals in the marketplace? Government-owned services, for example, enjoy such advantages as monopoly power, credit guarantees, freedom from paying investors an expected rate of return, exemption from bankruptcy, tax exemptions, direct subsidies, and immunity from antitrust prosecution, disclosure requirements and other regulations. Because they are not as concerned with profits, government-owned services can set low prices without regard to long-term losses.

"As a result, more efficient but unsubsidized private firms may have to downsize or decide not invest or start up if they have a government rival," points out Geddes, who last year published the bookSaving the Mail: How to Solve the Problems of the U.S. Postal Service .

Taxpayers suffer, Geddes says, because they end up funding much of the government-affiliated company's overhead when consumers would have been willing to pay for it as they do when using the services of a competing privately owned firm.

Using case studies, the economists discuss why government-supported services competing with industry are more likely to engage in anticompetitive behavior. The case studies include freight carried by Amtrak; electricity distribution by utilities such as the Tennessee Valley Authority; waterworks owned by city governments; and financial services provided by Fannie Mae and Freddie Mac.

"There is a significant need to revise policies in the United States regarding competition between government and private firms. At the very least, we need to examine how antitrust laws are relevant to state-owned enterprises and government-sponsored enterprises. Additionally, it may be wise to construe narrowly any statutory monopoly that is conferred upon a government- affiliated enterprise, and strictly limit its ability to expand beyond the market covered by that monopoly," Geddes concludes.

Source: Eurekalert & others

Last reviewed: By John M. Grohol, Psy.D. on 21 Feb 2009
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