A Stitch in Haste

Apparently the federal government thinks so:

The Overseas Private Investment Corporation (OPIC) was established in 1969 and began operations in 1971 to promote and assist U.S. business investment in developing nations. OPIC is a U.S. government agency that provides project financing, investment insurance, and other services for U.S. businesses in 154 developing nations and emerging economies.
…
OPIC political risk insurance is available to U.S. citizens, U.S. firms, or to the foreign subsidiaries of U.S. firms[.] This insurance covers three broad areas of political risk: currency inconvertibility, expropriation, and political violence.

Too bad OPIC’s expropriation insurance only applies to “developing nations and emerging economies” and not the United States Congress.

Kidding aside, besides the pesky fact that, by definition, no insurance can ever be a public good (private party + private party = private contract; the word “public” is simply not part of the equation), there is already a robust, global, private insurance market for natural catastrophes (except where the government pre-empts it, such as with flood insurance). So why can’t there be a similar private market for political catastrophes?

Perhaps the problem is that such a “political catastrophe” insurance market could never be profitable and therefore would never be introduced by the private sector?

Structured like a private corporation, OPIC operates on a self-sustaining basis and has recorded a positive net income for every year of operation, with reserves now totaling more than $3 billion.

The government is profiting from doing business with companies like Exxon? Go figure (literally).

The fact that OPIC can perform this function profitably (though it admittedly does so armed with vast, if thus far unused, borrowing capacity from the Treasury) shows precisely that it should not be a government agency in the first place. It is never, ever, a proper function of government to make a profit. Any service that can be provided profitably can be provided privately. Stated differently, you cannot have “market failure” without the “failure” part. And without market failure, there is no justification for public provision.

It’s like the Amtrak Paradox — its apologists insist that the unprofitable (i.e., unwanted) lines need taxpayer subsidies because private railroads wouldn’t offer them, but simultaneously insist that the profitable lines should also receive subsidies precisely because they’re so popular. Either-or, just so long as they get their billion, right?

The resolution of the paradox in the case of OPIC, meanwhile, is not hard to deduce:

Much of the rationale for OPIC relates to U.S. foreign policy goals, a premise that is being questioned by Members of Congress in a number of ways.

Obviously. OPIC is not about correcting a market failure but rather about pushing a policy agenda in spite of, not inspired by, market forces. Cf., “ethanol.”

Keep in mind also that just because OPIC itself is profitable does not mean it does not have negative side effects:

Economists generally oppose the use of subsidized credits to promote trade or investment abroad. They believe such subsidies tend to distort the flow of capital and resources away from the most efficient uses. They also believe that by promoting investment abroad, OPIC may be crowding out, and thereby reducing, some domestic investment. As long as OPIC’s non-federal collections — or the fees it charges the public for its services — are sufficient to cover all of its credit and non-credit activities (as indicated by some estimates), it may not have a negative impact on the federal government’s budget. OPIC’s impact on U.S. capital and resource markets, however, may well be negative due to the distortionary effects of subsidized credits.

But economists are all “elitists” anyway, so who cares what they think, right?

Filed under: Economics & Finance, Foreign Affairs, Libertarianism