Saving Capitalism . . .
from the capitalists.
Jan 18, 2010, Vol. 15, No. 17 • By IRWIN M. STELZER
If you still doubt that Pogo had it right, consider the problem of bankers’ pay and bonuses, huge sums for doing what the boss of Goldman Sachs calls “God’s work”—his refutation of the biblical notion that it is impossible to serve both God and Mammon. Nothing offends bankers and their conservative allies more than the fact that a “pay czar,” with implicit powers that far exceed his formal remit, sits in judgment of their estimates of what they should be paid.
Especially now that the major banks, having been bailed out by the taxpayer, have paid back their TARP loans. Leave aside for the moment that bank profits are inflated by the banks’ ability to borrow from the Fed at close to zero interest rates, and use the funds to buy Treasury IOUs yielding a safe return on the order of 3 percent. And that investment banks, those financial innovators and steely-nerved traders, have chosen to seek shelter by getting expedited permission from the government to re-define themselves as “commercial banks,” with special access to the Fed should they get into trouble. Or that some of their debt is still guaranteed by the Treasury. Or that they know they are now considered either too big, or too interconnected to fail—or both. Not exactly the sort of daring risk-takers that they represent themselves to be.
Concentrate instead on the business practices that set the tone in which the debate about bankers’ compensation occurs. These institutions, or at least some of them, think nothing of creating products to sell to their clients, while simultaneously selling those same products short for their own accounts so that they can profit from the expected fall in the value of the securities they are urging their customers to buy. A headline in the New York Times summarized the practice, “Banks Bundled Debt, Bet Against It and Won.” The banks contend that there is nothing improper about this procedure. Perhaps, but the word wrong comes to mind. And to the extent that it is practices such as these that contribute to profits, and hence to bonuses, executives have little reason to be surprised when politicians are put under pressure, or in some cases seize a long-awaited opportunity, to do something. (That “something” often turns out to be the wrong thing, is a matter for another day.)
Finally, consider the airlines, products of the innovative skills of the Wright Brothers and, ever since, the indulgence of the bankruptcy courts. These paragons of customer service somehow couldn’t solve the problem of providing food, water, and clean toilets to passengers stranded for hours on the tarmac on some 1,500 flights over the past 12 months that had what are called taxi-out times in excess of three hours—a tiny fraction of all flights, but this is the sort of thing where anecdote trumps data.
Delays happen, as every experienced traveler knows. But they also know that there is something wrong with a system that incarcerates them in a smelly aircraft only yards from a terminal, and with airline executives who cannot figure out how to parole them. Part of the reason is the lack of competitive necessity to do so, as many routes are dominated by one or a few carriers. Part of the reason is management sloth, or in the case of those who do “care,” sheer incompetence. And perhaps the greater contributor to these delays—Congress’s refusal to fund an updating of our obsolete traffic control system, or better still allow its privatization—is not immediately apparent to angry passengers.
So we now have fines of $27,500 per passenger to be levied against airlines that imprison travelers for more than three hours on the tarmac. Any money collected will go to the U.S. Treasury and not to compensate the passengers who suffered the pain of the wait. Such is the government’s sense of equity.
The industry claims that the forced return to the gate of delayed flights, or surrender of places in the takeoff queue in anticipation of possible runway delays, will result in more cancellations, creating even more inconvenience for passengers. Perhaps. But the carriers have little support for their antiregulation position: Abused customers do not make a natural constituency for private-sector companies arguing against regulatory intervention.
More examples could be marshaled, but they seem unnecessary to prove that Pogo had it right. True, much of the regulation that is being loaded unto American businesses is costly. But equally true, some or much of it could have been avoided if business leaders had not sought relief from the rigors of competition, had understood that politicians will pounce if business practices offend commonsense notions of what is fair and proper, and if incomes, especially high ones, are not broadly related to performance and do not provide incentives against behavior that creates systemic risk.
The policy question to be answered is not whether we should be suspicious of government efforts to supersede market forces. Or whether we should point out the economic costs of regulation. Of course we should. That’s the easy part. The harder question is to decide whether market capitalism is more likely to retain broad support:
• if directors are left free to cater to the executives they are supposed to be supervising, or are pushed in the direction of more fully representing the interests of the owners of the business, the shareholders;
• if insurance companies, just given a gift of 30 million healthy customers who must buy their products, are left free from both competitive and regulatory pressures to set premiums and decide just how much to require insureds to contribute to the profit pot, or have their profits and practices subject to regulatory review;
• if an airline, knowing that all other carriers will act with the same disregard for customer comfort and safety, is permitted to leave passengers on the tarmac for hours on end, without fear of penalty, or is fined to provide an incentive to more kindly behavior;
• if bankers, surviving by the grace of the taxpayer, are free to put bonuses before the shoring up of their capital base, or if some sort of restraint is imposed on their freedom of action, be it by statute or nomination to a Hall of Shame.
It is no good to say that there will be unintended consequences of any move by government to intervene. There surely will—just as there will be unintended consequences of doing nothing to correct abuses that are beyond the ability of markets to correct. My fear is that the latter might just be more damaging to the ability of market capitalism to survive than the former.
Irwin M. Stelzer, a contributing editor to The Weekly Standard, is director of -economic policy studies at the Hudson Institute and a columnist for the Sunday Times (London).
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