Opinion: Is Obama Spurring Growth, or Knocking it Down?

Opinion: Is Obama Spurring Growth, or Knocking it Down?

Government can spur the private sector. That's the gist of the argument that's in the air this summer. This week, for example, President Barack Obama said, "we've got much more work to do to spur stronger job growth and to keep the larger recovery moving." Such spurring is often said to occur in a technical way, when government outlays have a so-called multiplier effect that invigorates other economic participants.

The Obama administration has a second meaning for "to spur." It is that government entering an industry as a competitor will strengthen that industry and make it more honest. The president has said government entry into the health insurance sector will force the private companies to lower premiums.

But in reality the government isn't a spur, either kind. It's a competitor. And when such a big player jumps into a market, it tends to squeeze others out. Even promising industries -- the Internet sector, for example -- can be hurt.

This is what happened in the 1930s to the Internet equivalent of that era, the utilities industry.

In the 1920s, innovating utilities were providing power to millions. Wiring cities was easy. But much of the South and farms remained without power. "The South is tired of living in the dark," went the line.

So in the late 1920s venture capitalists and innovators put together a company that would get power lines, miles and miles of wire, to even the most remote of areas. They listed it on stock exchanges in search of the extensive funds needed for such a venture. The name of their company was Commonwealth & Southern. It was an exciting prospect because people loved electricity then as much as they do iPhones today. In all but the worst of years Americans used more and more electricity, for radios, for stoves, and for work.

Then came the New Deal.

FDR also accused the private companies of gouging. The president viewed the government involvement in utilities in the same way as President Obama views the new government role in health insurance. His TVA prices, he said, would be a "yardstick" against which to measure the extent of private sector profiteering.

As Commonwealth & Southern discovered, the TVA proved more than a yardstick. Its tax-free status as a government authority let the TVA charge prices so low C&S couldn't compete. In addition, the federal government helped the TVA win customers with legal bribes: they granted public works money to municipalities that opted to use government power. Towns like Knoxville and Chattanooga, for example, received federal funds for distribution centers and power stations.

As if that weren't enough, the New Dealers created the Rural Electrification Administration, which competed directly with Commonwealth & Southern to capture new territories. In 1935, Roosevelt pushed for and signed legislation that so constrained Commonwealth & Southern's ability to raise capital that the 1935 law won the nickname "Death Sentence." By the end of the decade the TVA ruled in the South. Its head, David Lilienthal, was buying up components of a fatally wounded Commonwealth & Southern.

Many then loved, and many now love, the TVA. Still, its existence and that of other government projects in this industry impeded general recovery.

Other power companies suffered a similar fate to C & S. As poorly as the Dow Jones Industrial Average did in the 1930s, the Dow Jones Utilities Index, made up of companies regulated, harassed, and competed with by Washington, did worse. Utilities stocks were also more volatile.

Just as Indiana pensioners today resent paying for the auto deals that favored unions over their pensions' bonds, owners of utilities stock then were furious at FDR. The disastrous performance of utilities stocks in the 1930s stands out because the industry was so promising: even in the Depression, demand for electricity was strong.

Even economist John Maynard Keynes noticed the damage to utilities, asking Roosevelt, "what's the use of chasing them around the lot every other week?"

The takeaway from the 1930s is that government spurs can be too sharp, and that government yardsticks quickly morph into birch switches. It's all something to keep in mind whenever someone proposes government help.

Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is preparing the graphic novel version of her bestseller about the Great Depression, The Forgotten Man: A New History of the Great Depression.

http://www.aolnews.com/opinion/article/opinion-is-obama-spurring-growth-or-knocking-it-down/19546404