Wednesday, December 10, 2008

Size Matters

To bail or not to bail, that is the question. The answer, quite simply, is yes. Over and over, completely and without fail no matter how much it hurts, and it’s gonna hurt, the answer has to be yes. For the sake of the health of our economy and way of life, if we are to even have a chance to try to do all the good things my friend Barry has proposed to actually bring this country properly into the 21st century, each and every giant industry teetering on the brink of collapse has to be publicly rescued. It doesn’t matter why these industries are in trouble – they have to be preserved for one very simple reason – size matters.

The banking industry, the auto industry, certain sectors of the insurance industry, and others like them which are all on the verge of self-immolation have to be given enough cash to buy time to attempt a genuine restructure because they are so big, employ so many people, and are the source of the livelihoods of so many more people that to allow them to fail will plunge the nation and the world into an economic tailspin which would make the Great Depression seem like just a bad day at the office. We could be looking at the start of a New Dark Ages.

This is the peril of uncontrolled Capitalism. Free Marketeers like to talk about the concept of “the invisible hand” and the “magic of the market” as if these concepts, frequently but incorrectly cited as core principles laid out by Adam Smith, function perfectly when no government intervention is allowed. The suggestion is that a perfect balance of supply and demand will only be disrupted if an outside force intervenes. The outside force generally blamed for messing up an economy in a capitalist society is the government. The charge often made, usually from right wingers or other misguided conservatives, is creeping liberalism, socialism, or communism. We started to hear such desperate cries towards the end of the campaign when Barry suggested to poor old Joe the Plumber that tax policy should be restructured in order to assure the wealth of the country could be spread around a bit more fairly. Heavens to Betsy!!

Let me make a distinction right here: Capitalism is an economic system, one which I would argue is the natural state of humanity. Socialism, Communism, and for purposes of this blog, Liberalism, are political systems which seek only to control the excesses of Capitalism. Capitalism can function perfectly well within any of the political systems and has for time immemorial.

Free Marketeers are as blinded by their delightful academic philosophy as are Communists. On a chalkboard in a classroom the graphs and supply lines for both look beautiful and elegant. The poetic language of both magic markets and to each according to his needs is elegant to the point of poetry. They are ideals that each ignores one very important reality – human nature.

Generally speaking humans are decent enough creatures. For the most part we are kind to and generous with our friends and family, the people we work with and for, and random strangers we come across on a daily basis. But not everyone behaves this way. Some are greedy and selfish, some mean and hateful, some plain crazy, psychotic and sociopathic. It doesn’t take too many of those bad folks to wreak an incredible amount of havoc in the world. Just look at what a couple of Arab loons in Afghanistan managed to do by convincing 19 half educated dead-enders to use planes as missiles to see my point. For that reason, to control the folks on the far end of the behavior spectrum, we create laws that lead to punishment for such behavior. In the world of commerce it’s the same. The most aggressive types of people will break or bend the rules of morality and legality to achieve their ends of being the best and the biggest. Sometimes that behavior can lead to incredible risk taking and successful innovation as a result. A fair amount of the country was conceived in that manner by those types of people. But those same people also engaged in the worst kinds of abuse and greed and immoral behavior to accomplish those feats. When too many go too far and then fail, we all suffer as a consequence whether we were in their game or not.

That is why at the beginning of the 20th century, government officials led by that symbol of rock solid Republicanism, Theodore Roosevelt, decided a lot of rules were necessary to protect the public from the abuses of the corporate class. Later his cousin Franklin Roosevelt instituted rules to assure that business worked in a controlled manner without undue risk. In the past 8 years a lot of those rules were thrown out in order to let the invisible hand work its magic. The obvious result is that we are all getting the finger from a handful of people who took untold billions, maybe trillions out of the system leaving us with nothing more than the printing presses to throw more cash into the stream of commerce. And as I said above, we have little real choice but to cut down a few forests to get it out there.

There is an alternative which was suggested during the period that the Roosevelts bookended. Louis Brandeis, Harvard law professor and later Supreme Court Justice advocated for the breakup of all large business conglomerates. He worried about the consequences of bigness in business. It is indeed true that the bigger a business is, the better able it is to benefit from economies of scale, to produce and to sell its products efficiently, widely, and cheaply. This is truly a phenomenon that works in the real world given the opportunity. But the failure of a big concern has ripple effects that extend well beyond the risk taking of the bosses of the company.
Average people, working people are that way because they don’t take the risks that the big boys take and that’s fine. We need people to work the assembly as much as we need them to come up with big ideas and put them into practice. Brandeis advocated for a less risky system that discouraged large companies and instead encouraged many small companies to exist. The wealth might not be as big for the folks at the top, the prices for goods might be a little more than it would be otherwise, but variety can be preserved, regional preferences can flourish, and market stability can be considered more reliable. In the case that some business should fail as indeed they would, the effects could be easily contained.

When a big company is still relatively young and successful, it can seem as if the gravy train can roll on forever. However what we’re seeing in the case of the auto industry for instance, is that with a few generations under its belt, the big three (GM, Ford, Chrysler) thought they were sure how the world works so never questioned their methods when international upstarts entered their market with a different variety of products and manufacturing methods. The men occupying the top of the corporate culture of the Big Three, who had nothing to do with the innovations that made the companies big, failed to innovate in order to compete in a world with competition. And so they are about to fail. That is the true nature of capitalism; not to carry on inevitably but to innovate or die or get eaten by the competition. Competition does not exist for the sake of competition but to destroy the competition til the winner stands alone. It's a brutal world and that can't likely be avoided. But it can be tempered. Only government wields the power to dictate terms that can temper the brutality of the market. And government needs to do that now. To allow the auto industry and any other giant industry to fail now is to simply allow the worst economic disaster to occur. If the government tries, at least there’s a chance of avoiding the worst. Throw out the current management for creating the mess, throw the cash in to get the current bills paid and do it long enough to get a new set of plans rolling quickly to keep people working, continue to get them paid, and to get a good product out. Anything less assures we all end up with nothing except guns and religion to cling to. And next time checks are written to the banks, it has to be done so with a requirement that it immediately moves through the system and into the stream of commerce.

All of this is just a finger in the dyke. The real work is to repair and strengthen the dyke. More about that soon.


The Sotten Libertine said...

The Current Administration's "Throw Money at the problem is about as effective as Christopher Columbus tossing messages in bottles into the ocean in hopes of a native writing back to tell him he's discovered the New World. With George Bush's resident apologist for China's currency manipulation Treasury Secretary Henry Paulson at the helm throwing money overboard like he was bailing water, (The Treasury annouunced today there is only 15B left in the first 350B of the Bailout) our friend Barry can't board this ship of sorry state soon enough. In order for this Bailout to work it has to have demands with teeth enough to force the Big Three from their position on maintaining an oil hungry vehicle. The Big Three are currently engaged in lawsuits to fight new clean air regulations in California. GM, Chrysler and Ford have all played a part in lobbying in Washington to change the Measures and Standards in determining the Miles Per Gallon Vehicle Rating, which amounts to no progress on this front and is little more than a game of Three Card Monte. The Big Three's practice of buying up patents and holding them in abeyance in order to quash competition needs to be opened up to public scrutiny if we are to pay for their mistakes and greed. Tucker and the invention of the Intermittent Windshield Wiper are only a couple of examples of the shoddy practices the Auto industry has engaged in. The Bailout must include a quid Pro Quo for a new business model that thrives on innovation as the desktop computer and the Cell Phone markets have demonstrated. How many times has Detroit proudly displayed "The Car of the Future" at their annual trade show only to never allow consumers to sully it with their Kids Meals and spilled sodas. Whatever form a Bailout may take; I don't believe it will be the one being presented to the Senate as the republicans have not even been a party to the current Bill's negotiations, it had best be understood by the auto industry that America expects the equivalent of an iPod for their money. Give us the iCar and we will come, anything less is a waste.

Anonymous said...

Too big to fail is too big to exist. From the ashes of fallen companies, some brigtht wag will come up with a competitive idea and build a new company. In a true free market, nobody gets a bail-out and the chips fall where they may.

ba said...

Hey Anonymous that's an easy thing to say from the safety of distance. Not so easy when the job you've had for twenty years suddenly ceases to exist because the idiots that run the company who don't know who you are couldn't think their way off the tracks in front of an oncoming train as the shrapnel from their fetid corpses is strewn across the land destroying all it touches simply because it was too big to fail. As I said, this is not an academic exercise, this is real life for far too many people. Past governments set the rules which allowed these behemoths to grow fat and stupid and now the government must use all available means to prevent the staggering destruction that will take place to too many regular folks if they fail to act. Acting may not work, but the effort needs to be made because a failure to act will surely lead to nothing but the worst in which case it doesn't matter that the money got thrown at the problem. Now an argument can be made that we are a democracy so if the government we elected got us into this, we should take the consequences. But a government put in place under false pretenses had more to do with this than one we got into with open eyes. This may be a topic for a future blog. and hey anonymous, sack up and give an identity of some sort, eh?