Some Problems with Nationalizing Businesses

Whether governments nationalize their country’s farms (Zimbabwe), oil industry (Venezuela), or mortgage industry (U.S.-- Federal Home Loan Mortgage Corporation and Federal National Mortgage Association), they all have several things in common:

  1. They are using the government’s force either to levy taxpayer money to pay for the seized assets or to confiscate those assets without paying for them.  The use of force does not encourage productivity in the long run (even if you are Darth Vader).  In fact, it discourages the accumulation of capital, especially in the industries that are being nationalized or partially nationalized.  Generally, the money “earned” in the nationalized industry either isn’t enough to keep the industry profitable, or the money is re-directed into other (politically correct) areas of the economy.  Either way, the nationalized industry (and any others that are feeding that industry) shrinks in the long run.
  2. They are taking over businesses that were trying to earn a profit and running them with taxpayer funds; i.e., without a profit motive, thus becoming an on-going taxpayer burden.  If your goal is to earn a profit and you fall short, you may still earn a profit.  If your goal is to break even and you fall short, you’ll probably suffer a loss.  Because governments are “non-profit” entities, they don’t have “earning a profit” as a goal and, therefore, they probably won’t earn a profit even when running a for-profit business.  Politics often gets in the way of earning a profit.  Look at the United States Postal Service (USPS), which Congress expects to “break-even” or earn a small profit.  During 2007 and 2008, the USPS lost a total of $7.9 billion, and roughly another $7 billion in 2009.
  3. They make it doubly difficult for the profit-seeking competitors to compete with the government-subsidized or government-guaranteed “businesses.”  How do you compete against a business that can force taxpayers to support it?  See page 12 of Berkshire Hathaway's annual letter to shareholders, starting after the 12 asterisks in the middle of the page.  These are Warren Buffett's thoughts about competing with government-guaranteed companies and the interest rates they pay. Even Warren Buffett is feeling the consequences of competing against government. Just think about the rest of the non-guaranteed non-AAA rated businesses out there! 
  4. They may have to raise taxes (or borrow more) to continue to subsidize their new wards.  This raises costs all around, making everyone a little poorer.  Remember, governments get their money from taxes, borrowing, and printing.  Before they can spend, they must seize their money from someone else first, or borrow it with the promise to tax and pay it back later (with interest).
  5. As more things are nationalized, fewer and fewer people will object because more and more people are employed by the government.  Government employment is generally perceived as less risky and more secure (for the same reason that government bonds are generally perceived as less risky than corporate bonds).  In time, a majority of voters will be in favor of more government, and the choice among political candidates will be indistinguishable—all in favor of more government.
  6. It becomes more difficult to know where to stop the nationalization process.  As more businesses fail, the temptation is to keep adding them to the government’s “portfolio.”  In the end, when the governments own everything, and no one is earning a profit, there will be no one to pay income taxes!  Congress will have to change to wealth taxes and value-added taxes.  And when the wealth has been consumed, they will have no choice but to print more fiat currency and force it down their constituents’ throats.

The bottom line is that governments, which are instruments of force, are the least efficient ways of allocating resources and obtaining prosperity for the largest number of people.  It’s better for countries to avoid nationalization.

Robert Jackson Smith

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