George McGovern, the 1972 Democratic Party presidential nominee, was a liberal icon. During many years of political office, including serving as US Senator from South Dakota, McGovern successfully championed a variety of regulations, taxes and mandates on behalf of the common good. But as a businessman, he was held to the point of failure by the same burdens he once earnestly promoted to achieve lofty goals.
For today’s most overzealous politicians, McGovern’s story is worth retelling.
In 1988, seven years after leaving the Senate, McGovern took over the lease of the Stratford Inn in Connecticut. For the first time, this former politician experienced what it was like to run a company while complying with government regulations and shouldering corporate taxes designed by people with little direct experience of the market. In the end, the inn failed, leaving McGovern with many observations about the discrepancy between the dreams of politicians and the reality of business owners.
In a 1992 Wall Street Journal op ed Entitled A Politician’s Dream Is A Businessman’s Nightmare, McGovern told how, as a Senator, he failed to realize the cost of compliance. He was unaware of how well-intentioned regulations often lead to poor outcomes, how taxes discourage investment, and how mandates make innovation or survival difficult, especially during recessions.
As McGovern wrote, “The concept that eludes lawmakers most often is, ‘Can we get consumers to pay the higher prices for the increased operating costs that come with public regulation and government reporting requirements with tons of bureaucracy ?’” He added, “In short, one size fits all business rules ignore the reality of the marketplace.”
As a matter of fact. A well-functioning marketplace needs rules – institutions such as property rights, an unhindered win-and-loss system, and fair and stable contract law. It also requires a high degree of freedom within the confines of these institutions. Basically, most government interventions in the market tinker with these institutions and impede this freedom.
An example is the obligation of companies to grant child care allowances to their employees. Sounds great, but this requirement hampers contractual negotiations between employees and employers about what the right mix of wages and benefits should be. Because employers can’t give benefits for free, and because every company and individual is different, mandating higher benefits means mandating lower wages. As simple as that.
Another example is the requirement that companies always use US-sourced materials in their infrastructure projects. It subjects factories to cumbersome permitting processes that increase costs and the time it takes to complete construction plans. Even when companies have the necessary financial and physical capital, the additional costs sometimes prevent them from pursuing their original goals. Other companies – as McGovern has learned the hard way – are crippled by the costs.
Excessive government intervention in the market is also getting in the way of politicians’ spending dreams. For example, the higher cost of building infrastructure means that every dollar spent on a new school or clean energy project doesn’t go as far as it would otherwise. Sometimes promised projects are not even built.
This government-created inefficiency unsurprisingly impacts things like the Inflation Reduction Act, a $400 billion statute meant build green energy. Well, some people worry that this plethora of regulations something could stand in the way of construction. This concern is justified.
As the diary reported, government spending is flowing at a time when “new wind installations plunged 77.5% in the third quarter of 2022 from the same period last year, according to S&P Global Market Intelligence. New utility-scale solar installations are likely down 40% in 2022 compared to 2021.” The culprits? Over-regulation, tariffs designed to ban sourcing from China, and opposition from NIMBYs to construction.
The same applies to industrial policy goals pursued by politicians, e.g CHIPS law with $52 billion in subsidies to build microchips. Factories must be built in an already over-regulated environment, and President Joe Biden’s administration just added mandates that subsidy recipients provide childcare, buy American products, stop stock buybacks, and more.
The government claims that it is doing this for the workers, but it does not consider the consequences, such as how the subsidization of company day-care centers could exacerbate supplier shortages in nearby centers that, due to government regulations, are unable to recruit skilled workers without college degrees.
Politicians today could learn from McGovern’s openness and honesty. Too much government will only stifle entrepreneurs and prevent long-term policy goals from ever materializing. It will also get in the way of the government itself.
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