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The Lockean Project

Bank On It

Bank on it — Monterey County Weekly — March 5-11, 2020

A bank owned and run by government is a bad idea (“Efforts to establish a public bank for the Central Coast are underway,” Feb. 27-March 4). There is no reason to think that a government owned bank would have lower costs. In fact, the opposite is the case. A large body of economic evidence has established that for-profit companies are more efficient than government-run ones.

The reason has to do with incentives. When a bank sees a way of cutting and reining in costs, it is more likely to do so than a government owned enterprise. Indeed, a for-profit bank, to remain competitive, must find ways to rein in costs. But a government-owned bank has no such incentive. If a government-run bank gets established, one danger is that it will get bailed out by other parts of the government. It will look successful, but will not be successful.

–David R. Henderson | Pacific Grove

Editor’s note: Henderson is an emeritus professor of economics at the Naval Postgraduate School.