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.