But this post is not once again about the negative effects of increasing the cost of doing business above those imposed by the market--it is about the perils of reducing them. For while many industries, like manufacturing and energy, have been hamstrung by government imposed (or sanctioned) costs others, like banking, healthcare and education, have grown much too large because the government has removed costs that would otherwise have been imposed on them in a true market-based economy.
Let's look at banking. From 1933 to 1991 commercial banks were restricted from investment banking activities by the Glass-Steagall Act. The rationale for this was that since banks were insured by the FDIC it was appropriate that the federal government restrict their activities. In 1999, the Republican-controlled Congress and President Bill Clinton repealed Glass-Steagall, having been convinced by the banking industry's arguments (and campaign contributions) that it would otherwise be unable to compete against investment banks and foreign banks. The banks were supposed to keep their new activities separate from their older, stodgier commercial banking businesses so that depositors' funds remained safe. What happened instead nearly blew up the world.
What happened was the banks took more risk than they could or would have otherwise in their new businesses because the depositors' funds in their traditional businesses were insured by the federal government! Insurance essentially eliminated the banks' risk so they took much more of it! Heads I win, tails you lose. Who wouldn't play that game? So bankers, with little to lose and much to gain, rolled the dice. And when they finally--and quite predictably--lost, Uncle Sam had no choice but to bail them out; they had bet so much that not only would they have killed themselves, but quite possible the world's financial system, as well.
Glass-Steagall kept the banks under control by prohibiting them from jeopardizing insured deposits on high-risk activities. It was only after its repeal that the banking industry's share of our economy became so large. Permitting commercial banks to undertake investment banking activities essentially extended deposit insurance to those activities as well. Investment banks, at that point themselves not able to compete with the commercial banks--since they weren't insured!--took on far too much risk. Lehman, Bear Stearns and Merrill Lynch blew up. Goldman Sachs and Morgan Stanley are still stumbling along. But the big banks, JPMorgan, Citibank and Bank of America are too big to fail? They're the ones that caused the crisis in the first place!
Insurance helps decision makers limit risk when they undertake an activity. However, insurance does not function unless there are restrictions on the activities of the insured. By repealing Glass-Steagall, a Republican Congress and a Democratic President did just the opposite--and in so doing encouraged an increase in risky activity that would never have occurred otherwise. Health insurance that doesn't restrict health choices has the same effect and so do below market student loans. Each of these increases the demand for the underlying service by reducing the cost to the individual of using them. Of course, the costs don't disappear--they're just transferred to society.
Trying to pick winners, the government never fails to do the opposite. In doing so it has distorted our economy to the point where certain industries--like banking--have become so large that they are either too big to fail or--in the case of education and healthcare--too expensive too succeed. Without government actions favoring them, this would never have been the case.