The Problem With Government Investors Isn’t Just That They’re Bad at It. It’s That They Shouldn’t Be Doing It.

When I wrote recently about the growing number of entrepreneurs, investors, and Wall Street veterans entering government to run industrial policy and public investment programs, many readers interpreted my argument as a simple warning: government is bad at investing.

It is. But the deeper point, which I failed to make explicitly in my syndicated column due to the lack of space, was perfectly summed up on X by Jonathan Hoenig: “government isn’t just inept as an investor—it’s immoral. Government has one role: protect individual rights not “maximize investment returns.”

He’s right. The problem is not merely that the government makes for a lousy investor. Government investing changes the moral relationship between risk, reward, and accountability.

In markets, investment is disciplined by consequences. Private investors deploy capital that belongs to them or that’s voluntarily entrusted to them. If they make bad bets, they lose money, reputation, clients, and sometimes even their careers. Prices communicate information. Profits reward value creation. Losses punish mistakes.

This discipline is central to what makes markets work. Government, however, investing operates under entirely different rules – rules that virtually eliminate discipline.

Government officials allocate resources extracted through taxation or borrowing backed by taxpayers. If projects fail, these officials rarely bear meaningful personal consequences. The losses are socialized. The incentives instead are political. Success is often measured not by financial returns but by press releases, ribbon cuttings, strategic narratives, or vague, untestable claims about resilience, competitiveness, and national greatness.

It is politics wearing the language of capital allocation. A good recent example is the expansion of the U.S. International Development Finance Corporation into maritime insurance and reinsurance for vessels transiting the Strait of Hormuz. The political goals of the administration are obvious, and whether that’s a good financial decision is secondary to why it was made in the first place. And again it’s using other people’s money to do it. Why should taxpayers be conscripted into financing these bets?

Another reason why there should be no such government investments is that they poison the economy and capital markets.

When Washington pours billions into favored industries – whether green energy, semiconductors, electric vehicles, or strategic manufacturing – the relevant question is not only: “Will these investments succeed?” It is also: “What opportunities are being displaced?”

Capital is finite. Talent is finite. Engineering expertise is finite. Every subsidized dollar changes incentives across the economy, leaving perfectly great projects biting the dust because they now have to compete for capital with the federal government investors.

Here’s an example. Remember the Department of Energy’s 1705 loan guarantee program? Yeah, that’s the one that extended $538 million in government guarantee to Solyndra and Abound Solar, and such companies. The debate around the program tends to focus on visible failures: the bankruptcies, the wasted taxpayer money, the embarrassing headlines.

But the larger distortion is harder to see.

Government support artificially lowers financing costs for politically preferred industries and firms. It signals to investors that some sectors enjoy implicit public backing while others do not. Capital then flows not toward the most productive uses, but toward activities most likely to attract political support. These unseen costs are real and significant.

How many entrepreneurs redirected their efforts toward subsidy-eligible technologies rather than unsubsidized alternatives? How many investors chased government-favored sectors because returns were effectively backstopped by taxpayers? How much private capital was diverted away from innovations consumers might have preferred but politicians did not?

We rarely know the answers to such questions because those investments never happen or they happen but they face higher borrowing costs ab=nd other distortions. We never really see the unseen victims of the government investor class. We don’t see the what could have been. In other words, the result of the government investor class is not merely occasional failure. It is a systematically distorted investment and economic landscape. And that’s immoral.

Oh and by the way, government “investments” don’t simply distort markets by redirecting capital toward politically favored industries. They also weaken the recipients themselves, dulling the competitive pressures that force firms to innovate, cut costs, and serve consumers better. See this older but always relevant piece by Chris Edwards.

The irony is that many former financiers now entering government once understood this reality. They recognized that prosperity comes from decentralized experimentation, not centralized direction. Yet increasingly, they seem to believe as U.S. government officials they can play markets investors. The assumption of super-intelligence underlying this desire is seductive: put successful businesspeople in charge and the government will behave more like a market. But institutions matter more than résumés. A brilliant investor inside government stops functioning as a market participant because the market’s disciplinary mechanisms disappear.

Hoenig is correct. The government’s central economic role is to protect property rights, enforce contracts, preserve the rule of law, and maintain the conditions under which decentralized market discovery can occur.