Government and Industry's Special Relationship

Perusing the latest news on government policy decisions gave me a clear understanding of public reactions to most government policies.  Here's a hint, they're generally negative.  If an industry likes a policy they seem to remain silent, potentially to not highlight their lobbying efforts.  If they disagree, they tend to be vocal about how a new policy will crush their industry.  Maybe the government wanted to crush the industry or maybe it was acceptable collateral damage for a greater social benefit.  It's easy to get wrapped up in the specific complaints and surface arguments, but it's more important to analyze the tradeoffs that led to the decision.

As an example, Germany modified their pharmaceutical payment plan to reduce the cost of consumer drugs.  Eli Lilly CEO, John Lechleiter, spoke on the issue, stating that the change will ruin Germany's traditional leadership role in pharmaceutical innovation. 

Eli Lilly CEO, John Lechleiter

Since the relationship between the price of drugs and the incentive to create new ones is well known, Germany must not have made that decision without understanding his point.  The decision must have been made understanding that the societal benefit of more access to drugs would outweigh loss in the domestic pharmaceutical sector.  The implication is that the German government must not believe that they are a leader in the sector globally, because their reduced contribution to the number of drugs is smaller than their citizens' benefit from increased in access to drugs.  If the same policy was implemented globally (or in the US), Mr. Lechleiter's comments would be more accurate.  This is also why a similar policy never gains traction in the US.

A common argument against these types of government interference, is that a market solution, such as cap-and-trade, is a much more effective way to meet a societal goal without dictating the specific solution.  The Australian Carbon Tax is such and example.  The government press release highlights the tax's benefits of innovation and alternate energy sector growth.

Understandably, the coal mining companies were vocally opposed to the idea.  They had some clever cartoons to illustrate their point.

This case may seem different, but it is really the same as the drug issue.  The Australian government has determined that the benefit of moving off of a carbon economy is more important than maintaining their coal industry.  In fact, it is pretty obvious that the government is intentionally ridding itself of the industry and must feel that the benefit of the growth in other sectors and the environmental benefit will outweigh their decision to move away from the coal industry.

A government policy to help one aspect of society will almost always be at the expense of another part of the economy.  The people that will lose will complain.  Rather than focus on the complaint, the decision must be well founded and the benefit must outweigh the cost to the penalized part of society.  There is not a policy decision that can be made without assessing the secondary effect since the tentacles of government extend so deeply into all aspects of society.  I just hope that our leaders are thinking of that while they play brinksmanship with the debt ceiling.

Failure is key to success

I read a BBC article on why Silicon Valley is successful as a center of entrepreneurship. There are a couple common lessons in it.  First, the success is driven from failure. The successes don't arise from organically or from past success. Success comes from lessons learned on how not to do things.  The second point is related to that lesson.  Silicon Valley has the infrastructure in place to allow failure, but more importantly, allow second and third chances. 

IBM Chairman Tom Watson said, "Would you like me to give you a formula for success? It's quite simple really.  Double your rate of failure."  This was well before Silicon Valley was what it is today, but the lesson clearly carries forward.  The important point is that the government needs to allow failure and expect failure from start-ups.  A completely laissez-faire government would let entrepreneurs get crushed by the burden of their failures.  However, the concept of the market "survival of the fittest" only works because people aren't actually killed by their early failures.  Of course, venture capitalist firms and banks aggregate the risk across many ideas, but the individuals starting have much of their private equity at stake.  Many business are started with second mortgages and credit card debt.

If the personal down-side risk of starting a venture is too much it will deter innovation.  If it is too little, there will be excess capital spent on bad ideas.  Government policy needs to walk the balance between making early stage capital available and too available.  The social safety net, including bankruptcy laws, needs to limit the personal risk without promoting unhealthy risks.

Finding that balance in practice is difficult.  Part of the benefit of the US is that each state can experiment with its laws and they vary significantly across the country.  I haven't studied it yet, but I would think that we could conclude that the social policies in California and Massachusetts are close to the right balance and may be a model to expand. 

This area of what government policy should be to promote development is a major area I hope to explore and document in this blog.  Hopefully, I learn something even if I make a few failures along the way.