Wrong On Two Counts

President Obama uses the Gulf oil spill to strike out against small government.  He’s wrong on two counts here.

First, this does not take into consideration expectations.  When you take government to be mommy and daddy, that changes how people will behave.  When the federal government makes it a job to step in and control things, it subsidizes greater risks on the parts of various actors.  There are also risk-transference mechanisms built into government behavior:  why drill deep in the ocean when ANWR is available?

Secondly, there is a knowledge problem (as in most other situations).  Back in the 1960s, horizontal expansion was considered a smart idea.  If you run a big dog food manufacturer, you want to branch out into consumer electronics, automobile parts, refrigerators, and small textiles.  That way, if there’s a down year for dog food, your bottom line isn’t hurt that much—the other, independent industries could keep you going until dog food picked back up.  It’s a plausible theory, but suffered from one big problem:  executive knowledge problems.  The types of people who can run a dog food enterprise probably can’t run an automobile part enterprise or a small textile enterprise, much less all three.  Each industry requires a certain amount of specialized knowledge, even at the very top levels.  You can’t simply hire dog food, textiles, and automotive experts and let them run their own fiefdoms—they’ll focus too much on their particular branch, and there has to be some kind of funds allocation mechanism.  So the people at the top lacked the necessary knowledge to keep these disparate industries correctly funded, and as a result, this actually increased the risk to the parent firm.  Eventually, companies which did this either went out of business or tended to spin back off and re-focus on core processes.

The same concept applies to the federal government.  No President will ever be an expert on forestry, oil drilling, military strategy, transportation, post offices, safety regulation, health regulation, pharmaceuticals, student loans, business loans, stock market regulation, etc. etc.  Even individual cabinet secretaries generally cannot learn enough specific knowledge to help much, and when they do, they tend to be more like the dog food and textiles experts above:  specific to the industry and unable to see the big picture.  There’s no way that a single person, or group of people, could collect and process the information necessary to balance even a fraction of what the federal government currently does, so as a result, you have things spiral out of control.  And unlike an open market, when government agencies fail, they usually don’t go out of business and almost never are replaced with superior enterprises—instead, they will be ignored, receive more funding, or be re-named and receive more funding.

But suppose that we took away most of the responsibilities of the federal government, leaving only a few core responsibilities.  In that case, a President could more easily become knowledgeable enough to balance the different processes, and one result from this can be a better-functioning government.