Quote of the day: understanding government

From the e-newsletter on the affordable housing production and financing industry, State of the Market 35: The last-mile counterpart, by David Smith of Recap Market Advisors:

Government is a factory that produces only two products

Though government exists to create beneficial outcomes – lower poverty, a stronger economy, a safe and secure nation – it cannot create these directly. Instead, government is a factory that manufactures only two fundamental products:

Laws. Variations of 'thou shalt not' – rules, regulations, boundaries, and approvals required.

Money. Variations of 'we will pay you if' – grants, subsidies, incentives, and credit enhancement (which enables leverage).

(Hot air and political vaporware, both of which the government produces in bulk, are merely accidental byproducts for which no productive use has yet been found.)

Because government can create only these two products, it tends first and foremost to see every problem in terms of those tools as the only potential solution:

What can we mandate or prohibit, and what must we pay for? Passing laws is cheaper than spending money, and forcing someone to provide a service you don’t feel like paying for seems like a smart solution – until the supposed providers deliver badly, hide, or leave the business, and no one is left to do your bidding.

After a while, government reluctantly turns away from its first product (laws) and manufactures its second product (money), at which point it runs into the next problem – lack of effective implementers who can turn laws and subsidy into outcomes.

This particular issue of the newsletter is about affordable housing producers and their need for money, which mostly comes from banks that need to meet Community Reinvestment Act requirements, and the current state of the market--which had been moribund for the last couple years in the face of the banking crisis, and how banks didn't need tax credits since they weren't earning money, which seriously impinged the tax credit market in housing (low income tax credit, historic preservation tax credit, and other programs).

This newsletter issue is particularly good at explaining how government systems work generally or not and how programs are implemented successfully or not, although this is done in the context of producing affordable housing.