Malinvestment: Crushing Innovation Where It’s Needed MostBy
One of the biggest problems from economies directed by bureaucrats rather than a free market is that the bureaucrats don’t just spend money on foolish areas that don’t make sense economically, but their diversion of funds causes money to dry up where it is needed. Thus the housing bubble, created by government intervention and waste, resulted in billions of dollars being lost for unnecessary home building when it could have been helping small business grow. When government creates artificial markets and bubbles that are sure to pop, there is a lot of hidden carnage in addition to the obvious disasters one sees down the road. A top victim of bureaucratic excess and meddling in the economy is innovation.
Right now, for example, the government continues to direct billions into solar energy in the name of advancing innovation, while simultaneously increasing the cost of patent protection for all innovators by about 15% due to the harmful new patent legislation that was just signed into law. Government interventions in the field of energy are often likewise tailored to increase the cost of energy to consumers in order to achieve political objectives that make little economic sense. We have not yet learned from the Solyndra scandal but continue to misdirect billions into areas with simply no hope of being economically competitive. The problem, again, is not just that those projects will fail. The deeper problem is that the innovators who really could make a difference are less likely to gain access to capital and less likely to be noticed in the market because of the artificial barriers they will face. The market is being skewed and real innovation by real entrepreneurs, the kind of innovation that can succeed and make economic sense, is likely to suffer as a result.
One of the mysteries of the current economy is why so little capital is going into business investment now in spite of all the billions being dumped into the economy. Part of the problem is that the artificially low interest rates being set by the Fed create an easy, low-risk way for banks to make money at our expense. They can borrow money from the government for almost free and then simply buy treasuries to collect the interest. When a risk-free cash cow is created this way, why should they want to make money the risky, market-based way by investing in businesses that can fail? But this cash cow distorts the economy and makes innovation more difficult in the long run. Innovation fatigue.
Want less innovation fatigue? Let’s not pretend that bureaucrats in DC know which innovations deserve billions of dollars. Let the market decide. And ditto for interest rates. Get the Fed out of that equation and let the market set the cost of money.