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Montana Viewpoint©

THE FREE MARKET ISN’T ALWAYS FREE

Sometimes itís appropriate for government to rescue business, but we should recover our costs

December 5, 2003

Most Americans believe in the Free Market, and agree that government shouldnt set itself up to compete with business, let alone take over a private enterprise and run it. But when our own pocket books are in jeopardy, were a little less pure about that. Sometimes we even expect government to rescue failing businesses, especially if allowing the “market” to take its natural course would create economic havoc for us.

For instance, in 1989 when the entire Savings and Loan industry was about to go belly up because of risky and fraudulent business practices abetted by deregulation, the Feds stepped in to bail them out. We didnt complain too much about that, especially because most of us would have lost whatever money we had entrusted to those Savings and Loan companies. Now heres a question I ponder: once the government fixes a failing business, should it return control to the folks who couldnt run it before? And if it should return it, shouldnt the government charge for the service of rescuing the business?

Ive been thinking about this lately because of a recent legislative audit on the Leaking Underground Storage Tank Insurance Fund. I get to study all this neat stuff because Montanas Legislative Audit Committee, of which Im a member, gets to review all routine and requested audits of state agencies. The Leaking Underground Storage Tank program (LUST, for short) was one of those audits we asked to have done.

LUST came about in 1989 as a result of a federal ruling that all leaking underground fuel tanks would have to be replaced and any spilled fuel removed. This is not a cheap proposition, and for a small Mom and Pop outfit selling gas, it would take a very, very long time to recover the costs of a leak cleanup. A smart business person would have had insurance to cover those costs, and might have if they could have afforded it. But the last thing insurance companies want to do is bet against a sure liability, and they werent at all interested in selling insurance to cover leaking gasoline tanks.

So, because the “market” would not cover the liability, the business owner was on the hook and on it big time, because any kind of leak would probably drive a small business under. Faced with this potential for economic disaster, the State of Montana, as did most states, stepped up to do for people what private enterprise couldnt, and provided an affordable insurance policy against fuel tank leaks.

In Montana, the LUST program is funded with a quarter of a cent tax on a gallon of fuel. In other words, the consumer is paying a governmental tax to save businesses from falling to free market forces. If youre wanting to get upset about that, don't forget to be upset about the hundreds of billions of our tax dollars that are still paying for the 1989 Savings and Loan bailout.

The LUST program has worked well, but it's now time to make some changes to make it more efficiently run. One of the suggestions is to turn the program back over to private insurers who, now that the crisis is over, can get back into selling that kind of insurance. This raises an interesting question: is it only OK for government to take over a business when it's in trouble, but not OK to keep running it once the crisis is over?

In a true free market economy, a business disaster would be paid for by the stockholders, who would bear the cost of the losses. This seems fair, since they get a share of the profits when things are going well. However, when government intervenes to save a business, the taxpayer takes the loss instead of the stockholder. You could call this socializing the losses and privatizing the profits. Once the taxpayers' money has the business running on the profitable side again, who should get to reap the profits: the taxpayer or the stockholder?

I believe in a free market economy, but I also believe it's sometimes appropriate for businesses to get governmental help in times of crisis. More importantly, I believe that the government has an obligation to its "stockholders" – the taxpayer – to recover the costs of fixing that crisis, and that those costs need to ultimately fall on the business or industry that incurred them.

In 1974 the federal government took over seven bankrupt Eastern railroads, formed a company called Conrail, and made it into a very successful concern. Once Conrail was on the right track, so to speak, it was sold to the private sector. In contrast, the Savings and Loan institutions are still being subsidized by the taxpayer. If Montana "privatizes" the LUST program, it needs to sell the business, not give it away by giving it up.

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620

jim@jimelliott.org