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We Tried This Before, and it Didn't Work

As the US implements the transformation of General Motors into “Government Motors,” and the Troubled Asset Relief Program (TARP) and American Recovery and Reinvestment Act (ARRA) raise government investment and entanglement in the private sector to historic new levels, the question on everyone’s mind is “will it work?”   Oddly enough, clues to the answer of that question may come from an unexpected place:  Iraq.

Several months ago I completed my one year tour of duty in Iraq.  Although trained as a Military Intelligence Officer, I was quickly reassigned and appointed as the 4th Infantry Division’s Economic Officer in Charge.  My primary responsibility was to create jobs and assess the overall business climate in Baghdad. 

The success we have experienced in Iraq is largely attributed to General David Petraeus’s leadership in the brilliant execution of counterinsurgency warfare.  The heart of the counterinsurgency doctrine focuses on securing the community in order to prevent an environment that breeds terrorist and passively supports insurgents. A key part of the strategy was to create jobs.  Reducing the number of idle young men roaming the streets without school or employment was viewed as key to reducing violence and unrest.

Coalition Forces employed a variety of programs to ensure the young men and elders of the community were employed.  The most familiar of these initiatives was the banding together of young men into community security personnel commonly referred to as the Sons of Iraq.  Thousands of jobs were also created and millions of dollars invested in the Microgrant Program.  Finally, millions in Coalition Force money was “invested” in State Owned Enterprises (SOE’s).

The American taxpayers return on investment from the Microgrant and Sons of Iraq initiatives were positive.  The Sons of Iraq were force multipliers, providing local security without deploying additional US and Iraqi soldiers in the community.  These security gains secured local markets, and business owners, employees and consumers alike could freely get to the market and back home safely everyday.  The young men were given a job and paid well for performing their job.  The economy realized healthy and sustainable gains.

Microgrants allowed individuals to reopen their shops or create new business.  These small business became the customers of larger distributors, which in return created even larger business.  As business began to expand, additional capital was needed and an Iraqi banking system, independent of the government banking system, sprang up to meet the demands of the market.

By contrast, the American taxpayers’ return on their investment in SOE’s was negative.  In fact, with millions of dollars spent on SOEs, not a single additional job was created in Iraq.  SOE’s encompass nearly all large businesses in Iraq.  Saddam Hussein nationalized these companies during the 1970s and 80s.  There are over one hundred and ninety SOE’s in Iraq, and all but a handful are bloated government bureaucracies that have three to four times as many employees on the payroll than show up for work on a daily basis.  The most basic fundamentals of business are foreign to management of these companies since their positions were, and most still are, based on political connections over market performance, education and experience.

On one particular mission, we visited a SOE that made automobiles.  Two things from that visit made an indelible impression on me. 

First, one of components consistently missing at the majority of the SOE’s was a sales department.  A sales department was never considered necessary, since the purpose of the SOE was to provide the needs to the state, in particular a state ruled by a dictator.  This SOE for automobiles was one step ahead.  They had a sales department.  However, their chief complaint was no one ever came to visit their sales department.  Take a moment to think about that.  Government involvement and patronage in this business had so thoroughly neutered them of any sense of market dynamics that even their sales department expected business to just magically come to them.

The second thing that struck me during our visit, was the single framed picture in the Director General’s (“CEO in Western Terms) office.   The picture was a photo of an over sized check from the US Government.  The pride and joy of this CEO was not his product or his people, but rather his ability to secure “free money” from the US taxpayer to subsidize his business regardless of its actual performance.  

As we head into the brave new world with its TARP, ARRP, and nationalization of major industries, we would do well to look at the lessons of a rebuilding Iraq.   As our successes in Iraq demonstrate, government can have a constructive role in creating stable environment for business in which property rights are protected, private enterprise can safely operate within a free market, and the risk/reward transactions of business investment can be pursued by free individuals. 

However, we must also realize that the nationalization of private industry and excessive government entanglement in the free market is a recipe for disaster and delivers a poor return on investment for the US taxpayer.    How many CEO’s in our own country can now display a check from the US Government in their office?  In times when executives should be making sure their salesmen are hitting the road and making sure their final product is well suited for the consumer, is the emphasis is instead focused on securing taxpayers dollars?

As our military men and women half a world away work to rebuild a statist, third-world system into a modern, first-world market economy let’s make sure that we are not moving our economy in exactly the opposite direction here at home. 

-July 2, 2009

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