I’ve always been concerned by arguments for doing something that involve morality. The argument if often made that if profits were going to be made by providing something, it is only moral that government should capture those profits. This of course got me thinking about the moral issues associated with crown corporations. There are at least a couple of big holes in using morality as an argument in support of crown corporations.
One of the key public goods that governments provide is a common set of rules and their enforcement. This includes the rules that govern how businesses operate. An unbiased set of rules and equitable enforcement are a central part of what makes effective states like Canada so wealthy. Thus it isn’t entirely unreasonable to think of government as a referee in sports. The system only works when we can trust the ref to be impartial.
Crown corporations are like the referees deciding they wanted to play, not ref. Another way of thinking about it would be if you’ve been at a game in which the referees were closely related to one of the players. Sometimes it works out OK, but a lot of the time it doesn’t. If we can’t trust the referee to be impartial, the system starts to break down. Crown corporations may thus be more damaging to the entire system than most of us realize. Were all investors treated fairly when GM become an American “crown corp.”? Nope, some were more equal than others.
Another consideration is the nature of business itself. Most businesses don’t workout and close. Many crown corps don’t work so well either. The difference is often the scale of the failure and who loses. When we’re talking about scale, governments don’t tend to think small and have access to an incredible amount of start up capital. In case there are some that don’t recall a crown corporation of size failing I’ve got a few examples. Bricklin Motors in New Brunswick was one example, yep that’s the same guy who was responsible for North American introduction of the Yugo. Spudco in Saskatchewan (a place generally known for pretty good government) provides another example. Of course many people tend to forget that FANNIE MAE and FREDDIE MAC (a big part problem of the boom and subsequent collapse of the American housing market) were the American version of crown corps.
Private businesses fail and so do crown corps. What’s the big deal? The big deal is where the money comes from. Private firms collect money from investors voluntarily, government collect money from citizens involuntarily. Nobody (well, there are some odd folk out there) pays taxes because they want to. People pay taxes because if they don’t the government will take their stuff and possibly throw them in jail. When I think a private firm is going to do something dumb, I can choose not to invest, in many cases I can even bet against the success of the firm. If my government decides to do something dumb, as a tax payer I’m on the hook and there isn’t much I can do about it. If we were talking about public goods, I wouldn’t be as bothered by this, but we’re talking about the provision of private goods here, things like cars, potatoes, and such.
The final point I’ll make is that government activity does tend to reduce private sector activity. Crowding has a long history in economics. There are two recent papers that provide important empirical data on the topic (Furceri and Sousa 2010 www.eeg.umminho.pt/economica/nipe and Cohen, Coval, and Malloy 2010 http://ssrn.com/abstract=1426106 ). Given that government spending crowds out private sector activity we might want to think really carefully about launching more crown corporations.
There are at least 3 reasons why crown corporations aren’t necessarily moral. I’m not even talking about the effectiveness of crowns. I’m talking just about the moral implications. When governments launch crown corporations they become referees choosing to play the game they’re supposed to supervise using money collected involuntarily to supplant other economic activity. Sounds morally dubious to me.