It's Not Illegal If The Government Does It

By Stephen D. Simpson, CFA | May 20, 2011 AAA
It's Not Illegal If The Government Does It

It's good to be king - and it always has been. Ever since the first government formed, there has been the idea that there are things a government can do that are illegal when done by private citizens. This power also extends into the world of commerce and business, where the government allows itself powers and latitude that private citizens and corporations simply do not get. Whether one wishes to argue that the government must do some of these things simply to keep the whole system running, it does not change the fact that the government does engage in behaviors that would be illegal for anyone else.

TUTORIAL: The Federal Reserve

Taxes - Involuntary Commerce?
Governments are unique in their power to levy taxes; in fact, it is one of the defining traits of a government. Even allowing that citizens do get something back for their taxes (roads, police, courts, etc.), the fact remains that it is not a voluntary transaction. There is no company out there that can similarly compel financial transactions - a homeowner can choose to turn off the power if that is their choice (though perhaps the new health care law in the U.S. will make health insurance inescapable). (For more, see How To Owe Nothing On Your Federal Tax Return.)

Monopolies
If a company somehow manages to rise to the top of its industry and operate so well that it effectively pushes out its competitors, it runs the risk of the government cracking down on its operation. Whether it was Standard Oil long ago, the original AT&T or Microsoft (Nasdaq:MSFT), the government has taken it upon itself to protect the public from the formation and operation of monopolies.

That is, of course, unless the government actually wants that monopoly in operation and gives specific permission for its ongoing operation. The postal service is one example; while living in a weird grey area between government and private, the postal service operates as an explicit monopoly. It is illegal, for instance, for a would-be rival like UPS (NYSE:UPS) or FedEx (NYSE:FDX) to deliver to mail boxes.

Many states also operate their own monopolies. In a few states, for instance, liquor can be legally sold only at state-owned stores (often called ABC stores). Likewise, many municipalities give exclusive contracts for services like waste removal or residential natural gas delivery. (For more, see A History Of U.S. Monopolies.)

Price Fixing
With few exceptions, businesses are not allowed to interfere with the normal price-setting mechanisms of the free market. There are, for instance, a variety of laws on the books against predatory pricing, as well as laws that forbid companies from discussing coordinated pricing in a market.

The government, though, can and does interfere with normal price mechanisms. More than once in the last 100 years, the U.S. government has resorted to wage and/or price controls in an attempt to control inflation. Elsewhere, the government continues to pay billions in farm subsidies and subsidies to ethanol refiners and blenders. Along similar lines, the U.S. has a specific program in place to keep sugar prices higher than they otherwise would by restricting imports, and the government likewise has exceptionally high tariffs on ethanol imports. (For more, see The Biofuels Debate Heats Up.)

Eminent Domain
In everyday life, someone cannot take your belongings against your will - that is called theft. Even if the robber leaves a $100 bill on your table, he or she is not allowed to come in and take your belongings without your permission. When it is the government doing the taking, though, sometimes it can be called "eminent domain" and made legal.

Most cases of eminent domain involve the building of roads, pipelines and utility facilities, but that is not always the case. The government has sometimes resorted to eminent domain in the interests of public safety (like the case of Centralia, Pennsylvania) or military security, but there are cases in the books of the government seizing property and then later handing it over to developers for commercial development.

While the government is obligated to pay a "fair" rate of compensation, and courts have often forced governments to increase their financial compensation, the fact remains that eminent domain undermines a fundamental principle of capitalism - the idea that people have the right to buy or sell if they want to do so, and the right to refuse to buy or sell no matter the price on offer. (For more, see Valuing A Real Estate Investment Property.)

Ponzi Schemes and "Creative" Accounting
Government critics love to trot out the tired and over-used notion that government programs like Social Security and Medicare/Medicaid are gigantic government-run Ponzi schemes. In that respect, then, it is only the sovereign power of government that separates them from Bernie Madoff.

Even though a Social Security can only be called a Ponzi scheme by completely misunderstanding the definition and operation of a Ponzi scheme, the notion persists. And even though Social Security is not a Ponzi scheme, it is hard to imagine a corporation that would be legally allowed to run its retirement or pension plan in such an irresponsible way and with such dubious accounting.

Going a step beyond that, the SEC (and to a lesser extent, the Depart of Justice) has prosecuted numerous companies over the years for deficient, misleading and otherwise creative accounting. Yet looking at how the government has tinkered with the unemployment, inflation and public debt calculations over the years, it would certainly seem to be a case of "do as I say, not as I do." (For more, see What Is A Pyramid Scheme?)

TUTORIAL: Personal Income Tax Guide

The Bottom Line
Governments have different goals, responsibilities and limitations than the private sector, so it is not entirely fair to expect the government to operate by the same rules as private citizens and corporations. The power to tax, for instance, is essential to the survival of a state and there are credible arguments that eminent domain serves a useful purpose when not abused. That said, it is a slippery slope and is difficult for a government to maintain the respect of its citizenry if it routinely engages in practices that would be illegal among the governed. (For more, see Government Regulations: Do They Help Businesses?)

comments powered by Disqus
Related Articles
  1. Educating Your Clients About Cybersecurity
    Investing News

    Educating Your Clients About Cybersecurity

  2. How The Patriot Act Works & Why Is It ...
    Investing News

    How The Patriot Act Works & Why Is It ...

  3. An Introduction to Government Loans
    Economics

    An Introduction to Government Loans

  4. How The IRS Works: Functions & Audits
    Taxes

    How The IRS Works: Functions & Audits

  5. The Government And Risk: A Love-Hate ...
    Insurance

    The Government And Risk: A Love-Hate ...

Trading Center