When the federal government takes equity stakes in private companies, it crosses a line that has long defined the boundary between free enterprise and socialism—or, to be more polite, state capitalism. The Trump Administration has seized equity positions in at least ten companies. Sometimes it has done so under the rubric of national security, but it has gone beyond that. It tried to bailout Spirit Airlines with a $500 million deal that would have left Uncle Sam owning 90% of the company. It also entertained an idea from the CEO of United Airlines to create a “national champion” carrier by having United merge with American Airlines. Thankfully, that airline scheme fell apart after American made it clear it wouldn’t go along with such a union. And bondholders and other creditors put the kibosh on the Spirit bailout.
But the White House appetite for a bigger hand in various industries and companies is still there. The enormous surge in the stock price of Intel, in which Washington took a 10% equity position, will only whet the appetite for doing more stock grabs.
Commerce Secretary Howard Lutnick acts more like a Soviet-style commissar than a champion of free enterprise. He has expressed an interest in Uncle Sam’s having a stake in various defense companies, for instance, as well as in other areas such as nuclear reactors. But White House involvement in the private sector hasn’t stopped there. It wants to impose interest rates caps on bank credit cards and is imposing price controls on certain pharmaceuticals. It got Congress to go along with ultimately banning institutional investors from acquiring single-family homes that would be rented instead of sold, under the banner of making home ownership more affordable.
A basic objection to all this is market distortion. Firms wholly or partially owned by the government enjoy real advantages: preferential regulatory treatment, insulation from failure and access to capital unavailable to purely private rivals. This tilts the playing field in ways that punish competitors and ultimately harm consumers.
Europe has long exercised a heavy hand in the private sector. Which is a key reason why their economies—with a few exceptions, such as Poland and the Baltic countries of Estonia, Latvia and Lithuania—have been such pitiful performers in this century.
There is also the problem of misaligned incentives. Private investors profit only when companies create genuine value. Government, by contrast, is subject to political pressures that have nothing to do with economic performance. An administration might prop up an underperforming firm in a swing-state district, delay necessary restructuring or steer business decisions toward political allies. History offers cautionary examples from Amtrak to Fannie Mae and Freddie Mac—entities in which government involvement produced chronic inefficiency and taxpayer liability.
Constitutional concerns compound these worries. The Founders envisioned a limited federal government, not one that sits on corporate boards. Equity stakes ultimately invite corruption and cronyism. A government that can reward or punish firms through both regulation and ownership holds coercive power that no truly private company can match.
Finally, there is the question of precedent. The policies of the Democrats are now set by its extreme, socialist faction. If they return to power, they’ll gleefully extend government tentacles into every aspect of the private sector. Free enterprise will be suffocated, and America will stagnate.
What makes these moves by the current administration so puzzling is that it has also pushed hard to reduce regulations and to cut business taxes.
When the government holds equity in corporations or institutes intrusive regulation, that’s state capitalism, i.e., socialism, which is wrong—morally and economically.
Leave a comment