Within the modern election cycle, it has become typical for political candidates, usually those quick to label themselves “conservative,” to run campaigns based on the platitude of “running the government as a business.”Â Former Massachusetts Governor Mitt Romney, and presumptive nominee in the Republican presidential candidate race, continues to get flack for suggesting his business experience could translate into competent governance.
The concept seems straightforward.Â If businesses can operate efficiently and at a profit, why can’t government?Â After all, the state receives an income flow and provides goods and services for the citizenry.Â Why can it not then turn a profit?
The answer is actually quite simple.Â It has to do with a process crucial to using resources effectively; that is economic calculation. Â Nearly a century ago Ludwig von Mises theorized on why socialism, where government controls the means of production in a society, is destined for failure.Â He argued that productive economic calculation is only possible if the pricing system is allowed to function unhampered.Â Without prices, it then becomes impossible for bureaucrats within a socialist regime to distribute resources in an efficient manner that best satisfies the individual preferences of millions.Â He writes:
Without economic calculation there can be no economy . Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be–in our sense of the term–no economy whatsoever. In trivial and secondary matters rational conduct might still be possible, but in general it would be impossible to speak of rational production any more. There would be no means of determining what was rational, and hence it is obvious that production could never be directed by economic consider ations.
As long as the state receives income through forced contributions rather than voluntary remuneration, there is little incentive to maximize return on investment.Â Without proper economic calculation, socialism is fated to deterioration. Â The Soviet Union’s collapse in 1991 would prove Mises ultimately correct despite it occurring nearly two decades after his death.Â While Mises was finally vindicated, the flawed notion of the state being able to conduct profitable business ventures still continues today.Â Recently in The Daily, it was reported that after running a deficit of $300,000 in 2011, the barbershop within the U.S. Senate was bailed out at taxpayer expense.
The barbershop ran almost $300,000 in the red last year but received an infusion from Senate coffers that is keeping it in business, the Senate sergeant at arms, Terrance Gainer, told The Daily.
A shampoo, cut and blow dry is $27 and highlights are $105, according to the barbershopâ€™s website. A trim costs $20, more than double what Sen. Patrick Leahy, D-Vt., gets charged when he goes to his barber back home.
Keep in mind that the Senate barbershop is tasked with providing haircuts.Â Not national security, a functioning legal system, or commercial infrastructure.Â Just haircare.Â Yet even gaining a return on such a menial service remains out of reach for Washington.
Even more astounding is the fact that there exists comparable private-sector competition just three blocks away from the Senate barbershop.
Former Sen. Peter Fitzgerald, R-Ill., blames the money woes on the stylists, who are federal employees. He contends theyâ€™re overpaid compared to their private-sector counterparts.
â€œThey are using union labor, and so their benefits and wages are higher than those of many jobs,â€ Fitzgerald said.
To support his argument, Fitzgerald contrasts the salaries and benefits of the Senateâ€™s stylists to what is offered by Capitol Barber, three blocks away.
Capitolâ€™s four barbers and stylists made $22,000 to $30,000 last year with no benefits, manager Lynn Dang said. At the Senate barbershop, formally called Senate Hair Care Services, the top four barbers and stylists made more than twice that â€” $54,761; $70,349; $73,658; and $81,641 â€” plus they have a generous 401(k) plan, health care and paid vacation. In all, the government contributed $230,000 in benefits for the barbershop, the Senate Appropriations Committee said.
The Senate barbershop’s money pit of a business model is not unique in contrast to similar private-run counterparts.Â Since there exists a general rule that governments are incapable of allocating resources as effectively as the private sector, history is abound of instances of the private sector competing and outwitting in providing services the government offers.
Perhaps the most famous of these examples is individual anarchist Lysander Spooner’s great face-off with the U.S. Postal Service in the 19th century.Â When Spooner observed that prices for government mail delivery were too high when compared to what he could provide by utilizing railroad services, he set to work to challenge Uncle Sam’s monopoly.Â The success of Spooner’s company, aptly named the “American Letter Mail Company,” wound up forcing the government’s hand and put pressure on Congress to lower rates in order to not become completely obsolete.Â Spooner was always one step ahead however and continued to lower his own rates.Â Rather than compete for market share like private businesses normally do, the government fell back on what it knows best to put an end to Spooner’s enterprise: violence and predation.Â After a series of costly lawsuits, Spooner gave in.Â The end result of the Postal Service’s triumph has been an unsustainable “business” model with the agency unable to operate in the black while perpetually in need of a Congressional bailout.
A more recent example is the highly unpopular Wall Street bailout known as the Troubled Asset Relief Program.Â The federal government remains eager to show that taxpayers actually made a profit after unwillingly having their money thrown at bankers who made poor investment decisions.Â A few weeks ago, the U.S. Treasury trumpeted its latest cost estimates on TARP and speculates “that the financial stability programs are likely to result in an overall positive financial return for taxpayers in terms of direct fiscal cost.”
Sounds like a deal right?
Wrong.Â As Jonathan Weil of Bloomberg points out, the Treasury’s projections are overly optimistic and assume no economic difficulty or threat of recession on the horizon.Â Additionally, it is assumed that Fannie Mae and Freddie Mac, the now-nationalized public housing corporations, will run large profits over the next ten years despite all historical evidence suggesting otherwise.Â Even more misleading are the “profits” the Treasury claims it receives from the interest the Federal Reserve earns on its bond holdings.
For instance, say the Fed collects interest on the Treasury bonds it holds, and later returns this money to the Treasury in the form of an earnings distribution. The payments from the Fed eliminate an expense for the Treasury. But to call them a gain for the Treasury is circular. The Treasury hasnâ€™t made a profit. The transactions are a wash, economically.
Talk about Orwellian.
Time and time again, the government has proven itself inept at operating efficiently.Â The inability to garner a profit has nothing to do with leadership however; it is function of the nature of the state.Â Murray Rothbard accurately sums up the matter by declaring:
there are fatal flaws in this idea of government-as-a-business. In the first place, a government service can never be run as a business, because the capital is conscripted from the taxpayer. There is no way of avoiding that.
Like the Postal Service or litany of taxpayer bailouts, the Senate barber shop is just another case of government’s inherent inability to use price signals effectively.
And as Gary North notes, the continued existence of the Senate barbershop is due to it being amongst the various perks the political class enjoys the expense of Joe Taxpayer.Â It is a pork barrel project to the benefit of Senators rather than the constituency they buy off to keep their jobs in Washington.Â As long as money still flows into the coffers of the state in the form of involuntary payments backed by the threat of imprisonment, the barbershop will be kept in business despite its obvious failure in money management.
This means Terrance Gainer’s wish for privatization is unlikely.Â But of course total privatization, that is operation under profit and losses solely, is the only way the barbershop will ever be able to operate as an efficient and profitable enterprise.
Anything else culminates in the â€œtrimmingâ€ away of wealth, a waste of scarce resources, and a poorer society.