Wednesday, December 10, 2008

What are some unintended consequences of the auto bailout?

Okay, I'll let the deep philosophical discussions (or lack thereof) on the new altruistic American business model rest for a second to discuss the bailout for the automotive industry (which will no doubt change in the coming days/weeks).

I thought the comment below, from the Cato Institute, provides a nice context for discussion.

"Surprise! President Bush is willing to spend taxpayers money and inject the federal government into the economy – yet again. The financial bailout might have been justified on the grounds that finance is the lifeblood of the entire economy, and a frozen credit system brings every industry to a halt. But a bailout for a specific manufacturing industry has all the hallmarks of lemon socialism. It puts the federal government in the business of picking winners and losers, reduces the incentive of other industries to avoid excessive risk, creates a lobbying frenzy, and brings the inefficiency of the government sector to the normally more efficient private sector, which under free enterprise must stay in the black or go out of business. But I want to focus on a particularly scary part of this bailout bill.

The bill provides that if the government gives companies money, the government will make some of their decisions: limit executive compensation, ban dividends, review large contracts, get rid of their executive jets (certainly a reduction in corporate efficiency, where the time of their top executives is the most valuable resource), make “green” cars rather than the cars consumers want, and so on. But it adds a new twist: The bill currently bars the car companies from pursuing lawsuits against California and other states trying to implement tougher tailpipe emissions standards. Jonathan Cohn of the New Republic suggests taking that concept further and requiring General Motors to fire a vice chairman who has expressed skepticism about the catastrophic effects of global warming.

This ought to scare any genuine liberal. Congress is going to use our money to censor political dissent? Usually libertarians warn that if you take government money, you’ll eventually find yourself subject to government restrictions on your freedoms. In this case, there’s no phase-in, no “eventually.” Congress wants to tell private companies, private individuals, that once they take government money, they will shut up and toe the government’s line.

If economics isn’t a good enough reason to oppose this bailout, preserving independent thought ought to be."

I think the author's point regarding political expression is valid, while at the same time recognizing this also creates a material disincentive to take government money, which I think should be the point. Make no mistakes, the deal will be very good for government, but can you also say the deal will then be good for taxpayers? Hmm. I get a little uncomfortable when I see media sources interviewing GM or Chrysler workers/suppliers who talk about how much they hope the government goes through with the bailout so they can keep their jobs. Does anyone see fallacious logic here? Whether or not the government grants the support, the big three will still have to drastically reduce excess and change business models, which means layoffs, plant closings, and breached contracts. Although staying in business is better, I think it might create a false sense of security for workers and suppliers.

Then there's this little gem of a comment I read in the NY Times:

"Basically what we have here is the corporate equivalent of AA meetings. “My name is General Motors and I’m a financaholic.” (Applause please!) His long suffering mother, aka the United States government, attends Alanon meetings where she justifies giving junior a large enough allowance so he needn’t work enabling him to stay drunk 24/7."

Where will the government draw the line? How many industries will/can we bail out? Is this the last one? Or are we just being taken for a ride (pun intended)?

Tuesday, December 2, 2008

Creative Capitalism

With an Recession officially under our belts, massive global uncertainty, and volatile capital markets, perhaps now is as good a time as any to revisit the traditional capitalistic model of making money. Earlier this year, Bill Gates delivered a speech at the World Economic Forum in Davos, Switzerland, entitled "Creative Capitalism." You can view his speech, which is about 20 minutes with an additional 10 minute Q & A, by clicking on the link below.

In his speech, Gates calls for a new form of capitalism whereby businesses focus some of it's efforts and resources towards eradicating the world's largest inequalities (i.e. Malaria, AIDS, Education, etc.). His speech received a warm response from the forum but was largely ignored by the global community (except for Warren Buffet and U2's Bono). However, yesterday on the Diane Rehm show, NPR featured a book called "Creative Capitalism" which is a compilation of essays and responses by some of the World's leading economists, legislators, and business executives on whether Gates' new business model, focusing on the global poor, could succeed. I looked through the table of contents and couldn't wait to read it. It takes a very "Hey, this is what he said to what you wrote, do you want to respond?" mentality which makes for some very passionate writing.

Gates' speech is worth listening to, if for no other reason than the fact that the majority of the fortunes of the two wealthiest men on the globe will be deployed to combat or solve some of these maladies. But what do you all think? Who is responsible for solving some of these problems? If it adversely effects shareholders, should businesses be required to direct valuable time and money to alleviate the spread of malaria in Africa? Is there a problem with how "shareholder value" is defined and should it attempt to quantify the value of a company's social impact? And what about Gates himself, he made his billions thanks to the current free market system. Over the last 20 years, he spent his valuable time working on building a global giant, watching every penny to get Microsoft to where it is today.

But what does everyone think? I would like to get your feedback.