Markets Know Better

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Colorado public officials and residents relearned a painful lesson last week—one that might stick a little better if it got the news coverage it deserved: Politicians make lousy venture capitalists and throwing tax dollars at industry doesn’t build the economy; usually it just throws money away.

That’s the bottom line of a report of the Colorado State Auditor reviewing the dismal performance of Colorado’s Energy Office (“CEO”). Though written in the measured tones of financial analysis, the exposed facts supply their own exclamation points, italics, and OMGs.

The CEO couldn’t document big chunks of where a quarter billion dollars went over the last several years. Contracts for as much as $20 million lacked standard documentation. Office officials and administrators couldn’t identify program goals or standards, criteria used to award grants, or point to any evidence of the effectiveness of the grants. Hundreds of thousands of dollars were spent on staff travel to exotic foreign destinations. The report’s flat narrative voice describes what sounds like the worst of Enron accounting, Wall Street indulgence, and indiscriminate stimulus money spraying in all directions, all compressed into an obscure, little state office.

Time will tell where the trail leads, whether Colorado’s journalist profession is up to the challenge of running the story down, and whether the information already in the public record is of any interest to local, state, or federal law enforcement.

But it would be a mistake to see this as a story mainly about one extremely badly run state office. Rather, it’s an illustration of important principles. When it comes to growing the economy, freedom works better than planning and control; supply and demand work better than political decision making. As we see in the CEO, and the many scandals reported and others not as widely reported in the federal stimulus boondoggle, politicians lack the skill set, the incentives, and in some cases the integrity, to distribute seed capital with the efficiency of actors operating in free enterprise.

In the first place, neither politicians nor the pundits and special pleaders who urge them on know what the next big growth opportunity is, where the next breakthrough will occur. A market of profit-seeking investors enjoys a permanent structural advantage over bureaucrats in spotting, responding to, and adjusting to the unexpected in economic opportunities.

Second, even well-meaning public officials are influenced by their own context and associations. Their decisions will likely be influenced as much by who they know and how they think the news coverage will reflect on them as by a sound assessment of growth potential.

Finally, as we see locally and nationally, the ability to hand out money without accountability for the bottom line can appeal to base, self-serving, and even destructive motives as well as positive ones.

In his first State of the State address and in each one since, Governor Hickenlooper has cited the importance of creating a positive business environment, of knocking down obstacles, streamlining unnecessary and burdensome regulations, so Colorado business and employers can act and invest with confidence. But in each address too, he has also given in to the politician’s temptation to play puppet master, to talk of planning and grants, incentives, programs and initiatives to steer the market better than producers and consumers could manage on their own.

So far this administration has done a lot of the latter and not much of the former. Mr. Hickenlooper and Colorado lawmakers sincerely interested in carrying out the governor’s goal, might be well served to reflect on the lessons accumulating before us.