If you like irony, the kerfluffle about the Obama administration’s proposal to privatize the Tennessee Valley Authority provides plenty.
Obama, viewed as a socialist by many on the right, is trying, a la conservative icon Margaret Thatcher, to get the federal government out of owning businesses.
Stalwart congressional Republicans like Richard Shelby of Alabama and Bob Corker and Lamar Alexander of Tennessee, who are all for small government, free enterprise, and lowering the national debt are decrying this move.
In general, the GOP has opposed the TVA since the multi-state government power conglomerate was established by Franklin Roosevelt’s New Deal in the 1930s.
Indeed, opposition actually precedes that, as Republican presidents Warren Harding and Calvin Coolidge tried hard to divest the federal government of the hydroelectric dam and nitrate plant at Muscle Shoals, Ala., built by the Democratic Woodrow Wilson administration to produce munitions for World War I. That facility eventually became the seed of the TVA.
Republicans opposed the TVA to a man in the 1930s. Wendell Wilkie, FDR’s dynamic opponent in 1940, was against it, as was “Mr. Republican” Robert Taft. Dwight Eisenhower termed it “creeping socialism.” Barry Goldwater saw it as a symbol of all that was wrong with U.S. government.
So why are GOP congressmen from the region now all opposed to its sale?
The simplest answer is that under private ownership, without an implicit federal guarantee of its debts and faced with the same requirements to pay state and federal taxes as any other private corporation, electricity rates would go up and TVA employment would go down.
That would be politically unpopular.
It is a case of “I’m against big government except when big government benefits me and my constituents.”
Cynics may say that it also reflects the fact that the guiding principle for the GOP right now is “whatever Obama is for, we are against.”
This is neither new nor surprising. Hypocrisy is a bipartisan phenomenon in U.S. politics, and one can find similar examples of Democrats flip-flopping on issues like military base closings when they benefit their districts or look good for their opponents.
So, politics aside, let’s examine the underlying economic issues in government ownership of utilities or industrial facilities, whether it’s the TVA, the Bonneville Power Administration, the cement plant long owned by the state of South Dakota or the North Dakota Mill and Bank of North Dakota.
The government got into the power, munitions production, irrigation, flour milling and Portland cement production businesses when voters and elected officials thought private markets were failing to meet society’s needs.
That probably was true in the 1930s, when many of these enterprises were established. One question is identifying whether “market failure” actually existed and why.
A second is whether these causes still exist and, if not, whether resources would be used more efficiently if these enterprises were privatized.
“Economies of scale” were one cause of market failure that led to the TVA, BPA and large hydro projects operated by the Bureau of Reclamation and Corps of Engineers.
Electric utilities were quite small 80 year ago, yet demand was increasing. Hydro dams on main stems of rivers large enough to be efficient required enormous capital investments, sums beyond the capital-raising ability of local or regional electric companies.
One could view such large capital requirements as a “barrier to entry,” a classic example of market failure.
The federal government, with large tax revenues and enormous ability to borrow, faced no such constraints.
There also was a flood control and barge navigation component to the government’s actions.
High “transaction costs” also played a role. Several private utilities could have banded together to build projects, but making this happen required leadership and an ability to coordinate that usually was lacking.
Moreover, building big projects often required assembling large tracts of land that was only practical using powers of eminent domain.
While government could exercise that on behalf of private businesses, making this happen was administratively cumbersome.
Taking people’s land to flood behind big dams was a powder keg and it was politically easier to implement if the government would own the dams rather than profit-making corporations.
“Imperfect information” also was present. Private utilities were unwilling to undertake rural electrification because they did not understand how much power eventually could be sold to farms and rural residents and businesses.
Based on assumptions of household use, the anticipated revenues would not cover the capital costs needed to extend lines through thinly populated areas.
The government did not understand this either, but when the political will to subsidize the initial installation brought about the Rural Electrification Administration and the power-generating entities like the TVA, it soon became clear that demand for electricity would be far higher than projected by private companies.
Unquantifiable risk was a variation of imperfect information that applied to munitions facilities like the Muscle Shoals nitrate plant, the Manhattan Project facilities at Hanford, Wash., and Oak Ridge Tenn., and even government-owned contractor-operated ammunition and gunpowder plants in New Brighton and Rosemont built for World War II.
No one knew how long the wars would last or, in the case of nuclear materials plants, if the technology would even work. No private corporation would make the investment in the face of such uncertainty.
“Monopoly power” was seen as causing failure of competitive free markets in North Dakota banking and flour milling.
A century ago, many of our neighbors to the northwest were convinced that the milling and banking monopolies in the Twin Cities were bleeding their state’s lifeblood.
These private monopolies’ power to use predatory pricing to drive new competing private companies out of business justified having the state establish a bank and a flour mill.
Are these factors still present? In most cases, probably not.
But citizens and businesses in the eight states served by the TVA have gotten used to the cheaper-than-free market electric rates that they enjoy through implicit subsidies from the nation’s taxpayers.
Just like any other special interest group, they will use whatever political muscle to preserve the “economic rents” they have captured.
And their elected officials are willing to abandon their philosophical principles to assist them.