Monday, October 6, 2014

EFFECTS OF THE GOVERNMENT OPTION

Image result for Unfair government competition

Are you familiar with the term, unfair government competition? That is when a government agency or government sponsored entity participates in the marketplace with private firms, while holding the advantage as a rule setter. In addition, the entity has the financial backing of the taxpayers, eliminating the need for efficiency and cost savings private firms develop to stay in business. In entering the market under the premise of increasing competition or choice, the creation of unfair government competition may appear popular initially, but yield negative consequences like reduced choice, increased cost, and exposure to consolidated risk in the long term.

The general understanding that competition is good for the economy is a foundation for economy, but when a provider has rule making authority or influence, it can create inefficiencies. Although increased competition provides greater choice, service, and cost savings, as firms compete for sales, unfair government competition allows rule making entities the ability to alter the market without improving the consumer experience. Similarly, the basis for opposition to monopolies is the negative influence that entity would have on market entry, cost structure, and consumer welfare, all the same with a government sponsored entity. Eventually, the private sector competitors will leave the market, either by shifting to more favorable segments or completely abandoning that market, reducing competition, choice, and consumer welfare.

Need an example? Take a look at the student loan market in the United States. Try obtaining a student loan from JP Morgan Chase, Citibank, Bank of America or US Bank. You would not have any luck, as these big banks left that market space. More appropriately been driven out of the market space. Government lenders and sponsored entities control a vast majority portion of the market for student loans. While many may argue in favor of the perceived low rates, the rates far exceed rates offered in other lending markets of similar size transactions.


In this market, government regulation restrict the method private lenders can use in assigning risk, therefore impacting interest rate offered. As the risk of default is not able to be limited to where it is created, lenders must establish a rate that covers the risks. In turn, government lenders entered the market offering student debt with interest rates set by legislation below private lenders, spreading the risk to the American taxpayers. Eventually, private lenders left the market and now the default risk is consolidated in debt held by the American taxpayer. At the same time, creators of the default risk, institutions with poor records on academic quality and placement, still lack any incentive to improve its students’ ability to avoid default. All the while, the rates offered far prime lending rates, despite the fact student debt is weighed differently than other debt.

The same pattern can be expected as government expands its presence in other industries. In the mortgage industry, government sponsored entities significantly contributed to the financial crisis. Now with healthcare in its sights, the same inefficiency, risk, and harm can be expected if further attempts to implement a single payer system. Instead of implementing a government option, the focus should be incentivizing growth in private sector participation in the area of need, as we do with alternative energy and other areas.
  

The rule setter in an industry should not be a participant in that industry. Avoiding unfair government competition will prove valuable to consumers, providers, and society. In addressing the needs of our society, the focus should be on fostering competition, increasing choice, and incentivizing behavior.  Faulty regulation and lax enforcement should not be an excuse for a rule maker in entering a market.