Private Enterprise/Public Debt

The trip to Washington by the automakers this week highlights one of the most common and troubling aspects of American capitalism - large private businesses which spend the majority of their time giving government the back of their hand, but run to receive public funds to boost their business at the first sign of financial winter.

For years, professional sports teams have been hijacking public funds from the local city, county and state to build the newest, modern and skybox-stuff stadia to host the team’s home games. Over and over the taxpayers are asked to foot the bill with bonds and sales tax hikes, and the even more insidious visitor’s taxes (so that we don’t have to pay for the new Dome, just the yokels that we con into coming to town for a conventions), while the revenues go to the team.

In 2008, the bandits have been businesses that are “too big to fail” convincing Congress to shovel cash into their coffers to stave off economic disaster. Ford, GM and Chrysler are only the latest in line, and they won’t be the last.

Everyone has wanted government out of the way, until the day of reckoning. Now they can’t snuggle up close enough. Pure capitalism requires a certain amount of giving the government the finger. But pure capitalism also requires that business operate entirely independent of government, and that has never been wholly true. Pure capitalism has always been a myth. Its proponents need to admit that, before they request any government aid.

Another problem with this approach is that it positively fails unless your company is big enough to throw some weight around. My guess is that $700 billion dollars loaned to every business with 100 or less employees in America would have done much more to stimulate the economy than pouring it down the sewers of Wall Street.

Leverage is a term that economists use to explain part of the financial meltdown. Companies are engaged in de-leveraging when they have to pay real money to cover their paper-asset bets. But leverage has been around a lot longer, in the sense more recognizable to fans of The Godfather - the ability to make an offer that can’t be refused.

Sports teams use their leverage, such as the increase in tax revenue to the city for all the sales of food and merchandise to all those people who troop into the stadium, the threat of moving to a city where the citizens will cheerfully pony up to make the team happy. They lean on these levers until the city fathers decide that they simply must build a new sports complex with enough skyboxes to pay for the team’s future bone-headed draft choices. But these deals never seem to result in the city recouping its investment with a share of the profits from the skyboxes, and parking deck, and concession stands. Usually about the time the bonds are paid off, it’s time to build another coliseum. Heads, I win; tails, you lose.

The pattern has been all too recognizable as large companies and financial firms approach Capitol Hill to scrounge a few billion in table scraps. The leverage these businesses use is the threat that their failure will cause even greater harm to an already struggling economy, that hundreds of thousands of job losses when the auto companies fail, that hundreds of thousands of houses will sit empty after foreclosure if Fannie Mae can’t re-capitalize. But as each of these companies tries (rather poorly) to humbly ask for help, we should not forget that they spent the past several decades paying lobbyists mucho dinero to fight against whatever Washington wanted to do that might cost them two cents per share in dividend. Heads, we win; tails, you lose.

Capitalism works in a simple model - maximize revenue. Take every advantage, squeeze through every loophole, maximize leverage to increase revenue and profits. There’s nothing intrinsically wrong with this model; it is still better than every other economic model tried so far. But for far too long, we’ve allowed companies to take actions that are simply contrary to the best interests of the country without holding them accountable for their decisions.

The automakers fought for decades over fuel efficiency. As recently as last year, they were hard at work again to undermine reasonable fuel economy standards. In 1979, Chrysler - which had caught it in the shorts when the oil crisis crippled demand for its fleet of big, ugly cars - convinced the government to issue it loans to avoid collapse. Chrysler took the money and spent the next couple of decades paying fat bonuses and dividends, while making a fleet of big vehicles that people still don’t want, and that didn’t enhance air quality or fuel economy one jot. Heads, we win; tails, you lose. The government hadn’t bothered to ask Chrysler to fix its brain-dead economic model or to be a better corporate citizen.

Fannie Mae and Freddie Mac spent millions lobbying to avoid Washington oversight and regulation - even though they are government-sponsored entities, whose losses are guaranteed by the full faith and credit of the US Government, in the first place. Huge pay packages and bonuses all around when business was booming. But with the mortgage meltdown came Fannie and Freddie’s likely demise, until the government promised to keep them afloat. Heads, we win; tails, you lose. The government didn’t require that executives return some of the bloated bonuses that were upon bogus balance sheets.

Banks pushed hard for less regulation, so that they could expand their business into flashier and more lucrative investment instruments - all of which have been exposed as an elaborate house of cards. The depositors are protected by the government, which is taking over banks as rapidly as they can spot the rotting corpses, now that all the phony wealth from creative and ultimately worthless investments has disappeared. But for a few years there, the banks were raking it in. Heads, we win; tails, you lose.

And all along the way, companies looked to find ways to shelter assets, off-shore profits, and relocate operations to minimize the taxes sought by the government. The wisdom of corporate taxation is for another time. For the present, these are the laws and those companies that worked to avoid them need to confess their sins - contrition before absolution, before contribution.

It is counter-productive and pointless to go back in time to identify the “bad corporate citizens” who are now clamoring for public funds. First, almost all of them are guilty of some amount of sacrificing responsibility for profits. More importantly, we are all complicit in allowing the lobbyists for capitalism’s interest to defeat the country’s interests. We’re the ones who kep electing legislators who didn’t mandate better tailpipe emissions standards, fuel standards, or transparency in financial transactions. We the people made the mess.

But that does not mean that cannot stop the endless cycle of private profits/public losses. We can quit financing stadiums for billionaires. We can require that money given to companies be investments, not simply loans to be paid back. We can claw back some of the obscene bonuses paid to executives who ran the company into the ground. At minimum, we should require that the company fire the lot of them and start anew. It is time for the carousel ride on the taxpayers' dime to end.

Bailout Fatigue

The big three automakers returned to Congress, somewhat contrite and with at least marginal explanations for how a bail out will help them, only to find that the audience is more hostile now than it was two weeks ago.

A couple of weeks ago I recommended that the automakers returned to Congress with detailed plans, with apologies for running their businesses into the ground, and with some demonstration that they are serious about not wasting money. They came through all of these points. However, that now appears to be not nearly enough.

One of the key factors is “bailout fatigue.” After all, we’ve been at this for months, to the tune of about $700 billion (which doesn’t actually include the 700 billion for Wall Street) for Citigroup and AIG and Fannie and Freddie. And there has not been a single indication that any of the money which the government has thrown at a private enterprise has succeeded in slowing the kamikaze descent of the economy. Skepticism, to say nothing of outright pessimism, reigns.

The contingent of legislators who have never been comfortable with the idea of the federal government pouring money into private business is now joined by those who have watched money disappear into the hands of companies with no accountability. The automakers have several other groups in opposition, but for now we will focus on the general sense of disgruntlement among the legislators.

Parenthetically, it should be noted that a significant cohort of the skeptics are Democrat. Ever since the election, there has been a concern that a Democratic controlled Congress will legislate the most free-spending and liberal policies possible. This debate gives the lie to those fears. Given the very real evidence that a bankruptcy by one or more of the automakers could toss thousands or hundreds of thousands of workers onto the streets, it would have been easy for the Democratic leadership to urge a blank check over the objections of Republicans in the House, Senate and even the White House. Instead, it is clear that the economic horror show of 2008 has reined in even Nancy Pelosi’s more socialist impulses.

One of the most compelling arguments against proceeding is that it sets the dreadful precedent that every business that is “too big to fail” could come to Washington with an appeal and walk out with another boatload of the taxpayers money. Unfortunately, there is no good retort to this argument. Yes, the auto industry is critical to American commerce. So was the finance sector. So is steel, farming, and energy production. Just because none of these people are currently asking Washington for money doesn’t mean that pretty soon they won’t.

The haste with which a number of brokerage houses and other financial institutions suddenly asked to become banks, in order to score some of the bailout cash, makes it clear any time a business can find a loophole, some CFO will drive his company right through it. If American Express can become a bank, who’s to say that a bicycle company can’t be designated as an automaker?

There are no good answers to the question of whether the country can afford to watch one or more of the major automakers file a Chapter 11. All anyone has is the suspicion that it isn’t going to work, the fear that more money won’t solve Detroit’s problems, and the hope or perhaps merely wish that this will be the money that marks the bottom and fiscal stimulus in the future will get the economy moving the right direction.

But it is clear that anyone coming to Washington needs to have not just a hat in hand, but a business proposal.

Georgia's runoff

The 2008 election campaign will finally conclude tonight, with the runoff election of Saxby Chambliss over Jim Martin in Georgia. (I know the counting continues in Minnesota, but at least nobody is still voting after today.)

The reason that this is the last act of the 2008 election cycle is because Georgia has a ridiculous rule requiring that candidates receive 50% + 1 vote to be the winner. This has got to be one of the greatest wastes of state resources imaginable - holding a whole 'nother election so that the 15% of the people who still give a flying rat's ass can go by the poll and vote for the same guy they voted for last time.

Even more sad than the idea that a state with a growing budget deficit is financing another election round at every single precinct in the state is how the god-awfully this campaign in Georgia has been run.

Neither one of these guys deserves to be elected to anything. Their campaigns have been 100% negative. Saxby Chambliss is the incumbent, but you wouldn't know it from the commercials he has run; there has not been a single ad listing an accomplishment, an initiative or even a truckload of pork that Chambliss has delivered for Georgia. Nope. Every ad simply lists all the reasons why Jim Martin is somewhere between moronic and evil. What has this guy done to justify six more years? No one can say. But at least he isn't Jim Martin.

Martin, who was a state legislator for a while, hasn't been any better. Chambliss' vote in favor of the Wall Street bailout has been fodder for Martin's commercials, when he wasn't saying that another Saxby term would be four more years of George W. Bush. What is this guy for if he gets to Washington? No one really knows. But at least he isn't Ssxby Chambliss.

And so, since the candidates are utter nobodies without a good idea between them, the campaign has become about how nasty, brutish and short life will become if there are 60 Democratic senators. It is simply pathetic that a sitting Senator cannot find any better reason for people to vote for him than that. Or that a Democratic challenger in a runoff after a significant Democratic victory in November cannot point to one way that he will help the incoming President.

And just to push the voters over the edge, their commercials tend to run back to back. You can't watch a football game without regular assaults of kindergarten name-calling - "vote for me, cuz he's a butt-head"

The new voters, black voters and mobilized Obama voters from November 4 are not likely to brave the cold to cast a vote for Jim Martin. The state is still demographically Republican, and so Chambliss will prevail in the runoff. Which is probably how it should be, since he did win more votes in November and would have been re-elected if Georgia didn't have this silly requirement of an absolute majority.

Saxby Chambliss is a non-entity who richly deserves the anonymity that he will soon disappear back into. But the alternative isn't any better. Georgians are faced with the choice of the lesser of two lessers. Incompentence rules either way.

Last and certainly least in this is that some idiots are going to decide that negative campaigning still works. That Chambliss prevailed in a runoff against an opponent whom he should have trounced easily in November is exactly not a recommendation for going negative; that Martin survived to a runoff without once articulating so much as an airy-fairy policy goal is exactly not a recommendation. But it can't be helped.

The real lesson of this runoff is that there is still a crying need for, and absolutely no hope of success for, a third party with ideas. An articulate fifth-grader running on a platform of reduced milk prices in the lunchroom could have won this election. Ge9rgia is getting the Senator it deserves - even if that other polecat should somehow win.