Overly Simplistic

So, how would it change the nature of American government if every law came with a sunset clause, by default? In order to persist beyond, say, three years, they'd have to be re-adopted. I believe that the primary change would be to make governance more experimental and more fluid. Good thing? I don't know. I think most people are annoyed by the very slow pace of positive change in this country, but probably most are happy that the pace of negative change isn't any more rapid.

Would there be other significant unintended consequences? E.g. Regime uncertainty? Could those consequences be mitigated in some way?

America's Competitive Edge

How did America become and why does it remain a super power? Here some possible factors:

• Large size - Basic economics tells us that there are huge advantages to be gained from specialization and trade. However, the magnitude of the advantage depends on the size of the market. For example, I can't specialize in making toilets if I live in a small village of population 100 and have no contact with the rest of the world. Why not? Because I won't have a large enough market to be able to sustain myself in that specialty. As a result, when someone does need a new toilet in my small isolated village, they will have to either produce it themselves, or hire someone in the village who has made toilets before to make one. Needless to say, quality will be low, and price will be high. America has at times been somewhat isolated from the rest of the world in trade terms. However, even during those times the US was a relatively large country with a large market for goods and services, and so it captured a large benefit from specialization within the market. I think this is also much of the explanation for the Soviet Union's ability to remain a super power for many decades during which it was economically isolated from the west.

• Free Market Capitalism - There are a couple of important features of free market capitalism that I believe make a big difference to the amount of wealth that is produced within the society. First, the freedom to compete within the marketplace spurs innovation, both for market incumbents and for new entrants to the market. I feel this every day at work (I'm an engineer working for a manufacturing firm) as we are constantly seeking to improve our processes and products in order to remain viable within the market. Everyone in the company knows that standing still means we'll all be out of jobs in a very short time because our competitors will beat us in the market with better products at lower prices. The second part of free market capitalism that is important is that it rewards good ideas and good execution, and punishes bad ideas and bad execution. Inefficient firms die while efficient firms take market share. The image below illustrates how differently capitalism is viewed in much of the rest of the world. If free market capitalism really IS an important part of high productivity and high standard of living, then those who reject it are putting the gun to their own heads.

•  Regime Certainty - This is the opposite of regime uncertainty, where no one is sure if the law will be the same today as it is tomorrow, whether there will be civil war tomorrow, whether property rights will be respected tomorrow, etc. The US has been stable and secure, with mostly predictable application of the law, for decades. This matters! When there is regime uncertainty investment drops because the value of any investment is a value that will mature over time, and uncertainty about the future of something as basic as the law or property rights decreases the value of any and all investment. Look to sub-Saharan Africa for an example of what regime uncertainty does to growth. Of course, the concept of regime certainty also embraces the fact that America was not ravaged by two world wars during the 20th century.

•  Immigration - The US accepts more immigrants than does any other country in the world. The US is characterized by its immigrant population, including those of us whose ancestors came here prior to the 1930s, and now think of ourselves as 'typical' Americans. I think that it is the case that the US has been very successful at attracting the best minds and the most innovative people from around the globe, in part because of the benefits of free market capitalism and regime certainty. Innovative people are drawn to places where they will be free to innovate. Entrepreneurs are drawn to places with regime certainty. I think this is much of the explanation for why the US is such an innovative and entrepreneurial nation. Listen to Paul Graham's comments on immigrants starting businesses to get a better idea of what I mean.

Now I know that this list isn't exhaustive, but these are the main things that come to my mind when I puzzle about the US and its accomplishments and place in the world. What have I left out? Or better yet, what is wrong in my approach altogether to this question?

Picking Winners

In an earlier post I asked "How do you think the founders of Tesla feel about GM being propped up by the government?" Well, it turns out that Tesla can't complain too much. I guess I should have known.


I'm worried about the government funding companies, whether startups or established players, because government investment drives out private investment, and because the companies who receive support have a competitive advantage over the ones that don't. Why is this an important problem? Because the government doesn't know which companies are going to be enormously productive, and which ones won't. Just as an example, what if the government had propped up Ask Jeeves at the expense of Google? Of course I don't actually know what would have happened, but it's possible and maybe likely that Google would have been crushed or absorbed before it had a chance to bring so much value to so many people.


Econtalk has a great interview with Y-combinator partner Paul Graham. Graham says that government attempts to 'create the next Google' are doomed to failure because no one knows what the next Google is going to be like. By definition, the next big innovation is going to be something that is not currently understood well enough for the value to be obvious. It's ludicrous to me to think that government bureaucrats, no matter how competent, are going to be able to predict which companies are the future sources of important innovation, and which aren't.

Survival of the Most Fit

I know that it's not an original observation, but Too Big to Fail and similar policies to protect people and businesses who do a poor job are seriously interfering with the basic premise of a market economy.

James Kwak has written a post about how Citigroup CEO Vikram Pandit seems unable to present a meaningful description of his business strategy.

It's not uncommon to witness top business leadership governing on ego or otherwise failing to understand the limits of their firm's competency, and value in the market. One of my favorite examples is Daimler Benz CEO Jurgen Schrempp's famously bad decision to acquire Chrysler. The evidence suggests that Daimler's management team had no workable strategy for how to make use of their purchase or how to integrate it into their organization. No meaningful synergies were ever anticipated, nor did any emerge - as was practically guaranteed by leadership's policy against platform and technology sharing between Chrysler and Mercedes. In the end Schrempp was fired and Daimler paid Cerberus to take Chrysler off its hands.

This story perfectly illustrates how a competitive market is supposed to function, with severe chastening for incompetence. Interference in this process, even for the best reasons, will introduce pernicious effects.

Moral Hazard - Moral Hazard is a technical term that means that the risks of my actions are borne by others, not by myself. Moral Hazard explains why innovations in automobile safety systems, like airbags and seat belts, has resulted in increasing risk to pedestrians. It also explains why beach homes continue to be built in locations that put them at risk in the event of a hurricane (because the government has historically bailed out the wealthy owners of these sometimes non-insurable properties).

Picking Winners - When an incompetently managed firm shrinks or dies, an opportunity opens for the most efficient competitors to take market share. Bailing out large incumbent firms that perform badly interferes with the success of other, better run companies who are then forced to compete without the benefit of government backing. It also tends to strangle small upstarts who are bringing new value and innovation to the market. How do you think the founders of Tesla feel about GM being propped up by the government?

Regime Uncertainty - Perhaps most pernicious of all is the effect of Regime Uncertainty. This is a reluctance on the part of investors to put their money into markets, industries, or countries where the rules are not clear, or could change at any moment. Why has sub-Saharan Africa failed to develop? Well, one reason is because people are reluctant to build businesses in a region that suffers from frequent civil war and political tumult. If I build a factory in Tanzania today, will it be destroyed or seized by government tomorrow? Similarly, how willing am I to try to operate a business in any market where the government is making up the rules of competition and ownership day by day? Consider how the government chose to take money from GM's bond holders and transfer it to the UAW.

Systemic risk is a matter of incentives. Too Big to Fail is magnifying the wrong incentives.