The Most Painfully Scarce Resource

posted at 12:27 am on May 1, 2009 by Doctor Zero

Over at National Review Online, a Corner post by Mark Hemingway caught my eye:

Q: What Would Happen If Government Tried to Build an Iphone?
A: It would cost roughly six times as much and not work.

The census decided that one of these crazy new smartphone/PDAs that all the hepcats are using would help in their counting. But simply writing a new piece of software for an existing Blackberry or Iphone was way too elegant a solution. So the governent threw millions at a military contractor and produced 525,000 of what looks like the Trabant of smartphones. The bottom line:

In other words, the relatively lame device my friendly enumerator was carrying, which cost $600 million, doesn’t actually work well enough to use for its intended purpose, is still being used in the field, perhaps so that it can be readied for 2020? Anyone believe that we’ll be able to do better than a half-pound, paperback-book sized plastic brick within ten years?

I haven’t traced the story back thoroughly enough to understand why the US government didn’t use an off the shelf device. My guess is that the requirements (encrypted data streams between device and server, biometric security, a variety of paths towards data networks, mostly via cell networks) were tough for commercial handhelds to meet. But it seems like one pathway might have been to remove the most arduous of those requirements – the biometric sensor – and use a platform whose hardware had been extensively field-tested as a mobile phone, and simply debug a secure communications layer and a data collection application.

Then again, that’s probably why I don’t work on government IT projects anymore.

This got me to thinking about a resource that’s becoming increasingly scarce in the Age of Obama: risk.

How did the iPhone come into existence? Because Apple gambled hundreds of millions of dollars on design, research, and marketing, in the hopes they could create a hot new consumer product. There was no shortage of smart phones on the market when they began this enterprise – BlackBerries had been around for years, and lots of consumers already owned portable game systems like the Nintendo DS, and tiny portable MP3 players. Apple wasn’t addressing a desperate need. They were taking a gamble, and it paid off.

Stock brokers do the same thing every day, risking the possibility of losses in the pursuit of profitable investments. Pharmaceutical companies risk billions developing new drugs and bringing them to the market, knowing that one round of bad FDA tests could sink a product that took years to produce. Banks, as we have all been painfully reminded recently, take a risk loaning money to individuals and businesses. Politicians love to celebrate the “spirit of American entrepreneurship,” but it’s a phrase many of them toss around without understanding what it means. Entrepreneurship is defined by the assumption of risk. A business enterprise isn’t a “bold American success story” if success was absolutely guaranteed at the outset, as it very rarely is.

Entrepreneurs don’t undertake this risk blindly. The guys working the trading floors in New York every day aren’t making wild guesses, or throwing their money randomly at long-shot stocks. If they wanted to play that kind of game, they’d be in Vegas, where they would at least be getting free drinks. Responsible businesses accept carefully measured risk, and exploit opportunities they believe will bring the greatest reward. The iPhone could have been created by Microsoft, Sony, Samsung, or many other companies, but it was Apple that had the vision to see an opportunity, and accepted the risk of spending millions to take their shot at profiting from it.

Risk is becoming a scarce resource, because the vast and clumsy power of government is blundering through the economy, trying to be like one of those schools that gives an automatic trophy to every player in every game. Worse, the government destroys the confidence of investors, because it compromises their ability to measure risk. Who’s going to make an investment anywhere near the radioactive monster AIG has become, knowing the government could make that monster thrash in any direction unexpectedly? Who wants to gamble huge amounts of money on a medical industry that could be nationalized this fall? Why would banks use that TARP money for its intended purpose of making loans to jump-start the economy, when they know Obama is willing to nullify contractual agreements and alter the outstanding balances of loans by fiat, to favor preferred constituents? What brilliant investor would accept the risk of working for one of these government-owned corporations, when they have no way to calculate the rewards – because those rewards could be snatched away from them, by a couple of senators who suddenly decide the bonuses they authorized are “obscene,” and a President who smiles his approval on angry mobs which intend to “re-negotiate” on their front lawns?

The government is a violent and unpredictable player in any market it enters. Potential risk-takers will frequently decide to quietly fold their cards and sit on their chips, because they have no way to anticipate what this hulking new player will do – it exists outside the normal system of reward and failure that defines the behavior of private companies. People like Barney Frank and Chris Dodd inflicted incalculable damage on the American economy, and they are still there. Barack Obama will likely prove to be the worst CEO General Motors ever had (and that’s saying something!) but no matter how badly his directives damage the company, he will never be fired or disciplined, and his authority can never be challenged or reduced, until 2012 at the earliest. Even then, his fate will probably have very little to do with how badly he manages GM. Politicians who run corporations will always put the profitability of the corporation very low on their list of priorities, far below things like diversity in hiring, environmental sensitivity, and other considerations that seem insane to businessmen attempting to calculate risks and rewards.

The state-run economy also destroys the value of risk by eliminating the consequences of market failure. If GM had been allowed to go bankrupt before its bailouts, as the market clearly wished for it to do, thousands of customers would have been released for other auto manufacturers to snap up through competition, and the resources of GM’s suppliers would have begun to shift, to meet the needs of other auto companies. Investors and executives are keenly aware of these looming opportunities, and plan ahead for them. How much wealth was lost when the advance business plans of other car companies, to exploit the opportunities a dying GM would provide, were suddenly voided because the government dropped billions of dollars into GM’s pockets from out of thin air?

The greatest structural problem facing our economy in the next two years will be the increasing reluctance of businesses and investors to generate the invaluable resource of risk, because taking a chance with this crew in the White House is like sitting down to a game of Monopoly with your endlessly whining little sister, your weaselly cheat of a little brother, and your violently unstable father… who’s more likely to lash out at you than either of them, because you’re easier to hit, and nobody else wants to hear any of your complaints.

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