25 July 2005

Corporate Stupidity

One of the core values of the Republican party is that private businesses make better decisions than governments do. The premise, of course, is dubious. But, aside from Scott Adams, creator of Dilbert, Democrats don't always do a good job of reminding Americans of that fact.

As political animals we get wrapped up in fixing what we know best, government. How many times a week does someone propose a constitutional amendment on this site? But, wouldn't we be better served politically by focusing our attention on corporate stupidty and by association, the reforms that corporate America needs to make our country a better place to live?

The Darwinian Answer For Small Business

At the small business level, the incentives of a market economy can work pretty well. Well run businesses survive. Poorly run businesses rapidly join the 50% that don't last 5 years statistic (notably with the predominant reason for failure being bad management). Poorly run small businesses often don't get very big, so the harm to the overall economy of this trial and error approach is pretty modest.

At the big business level, a Darwinian approach has real problems.

Industry Level Collective Stupidity

First of all, problems at the big business level are often industry wide systemic problems. You don't lose one steel company, you lose a whole industry. You don't see one tech start up collapse, you see a tech bust. An entire S&L industry collpases until it becomes a national crisis. You don't see one flailing airline or car maker. All the domestics in the industry simultaneously see everything start to come apart. You don't see one big accounting firm allow deceptive statements out the door and promote questionable tax shelters, they all do it.

Oligopolistic industries are prone to group think, and if the conventional wisdom among couple dozen key decision makers in a particular industry is wrong, everyone in the industry suffers and no one company gains a competitive advantage over anyone else in that same industry.

Collective corporate stupidity, of course, does immense harm to the usually completely innocent people who work for and do business with these corporations. Inevitably, there are mass layoffs, and all too often, there are broken retirement promises as well. Often, the lost jobs leave the economy for good. The manufacturing sector in the United States is the most recent example, but surely will not be the only one.

The Cost of High Stakes Failures

Second, when the stakes are high, simply letting corporations be free to be stupid and fail is bad policy. When you child makes a low stakes decision that is a bad one that the child will regret later -- say buying snacks now, even though you know that she will regret it when it comes time to go to the mall next weak for a bigger purchase -- you may give a warning but leave your child free to screw up, because failure teaches lessons in a more memorable way.

But, there are some high stakes decisions we don't give people the freedom to screw up. One of the distinctions between liberals and conservatives is that liberals don't believe that freedom always trumps making a good decision. You don't give a child the freedom to run out into a busy street and learn that hard way that this is a bad idea, even if that means physically restaining the child from doing so.

Much of the debate over consumer fraud laws involves whether we should prohibit people from making bad decisions like entering into payday loans at 300% interest. Democrats tend to say that some transactions are almost always ones that the consumer will ultimately regret. Republicans typically are willing to let the poor suffer from their own mistakes and ignore the culpability of someone who offered them the clearly bad deal.

But, the issue of giving private parties the freedom to make bad decisions isn't limited to those in poverty or near poverty. It also applies to big businesses. Should we let big businesses run themselves into the ground through clearly bad decisions at the cost of huge numbers of jobs, or should we as a nation find ways to intervene before they get out of hand?

The Fall of Anti-Corporate Stupidity Laws

In recent times, we have erred on the side of freedom. The repeal of the Glass-Seagal act has permitted commercial banks to play the stock market again. Energy deregulation permitted Enron to happen. Airline deregulation has contributed to the utter mess that is the current airline fare system which is on the verge of sending numerous airnes into bankruptcy.

Now, obviously, regulating corporate stupidity is not an easy thing. But, to say it is difficult, is not to say that it can't be done successfully.

Economic Regulation Success Stories

There are notable successes. The regulation accompanying FDIC deposit insurance has virtually ended the threat of industrywide bank collapses. More quietly, diligent state regulation has made the collapse of insurance companies a very rare event. Historically, strict underwriting standards have prevented mass defaults on FHA and VA loans -- although these standards have recently fallen and we have yet to see if this will produce a housing bubble. Regulation of public utilities has keep rates understandable and kept reliability reasonably high. Regulation of the quasi-public postal service has given the United States the cheapest postage in the world, without significant subsidies, in one of the largest countries in the world both geographically and population-wise. Public ownership of utiliities in the TVA region, has produced cheaper power than private industry would have been able to achieve.

Health and Safety Regulation Success Stories

Good regulation can dramatically improve health and safety as well. Intense safety regulation in the mining industries has greatly reduced injuries to miners while maintaining profitable industries (it is hard to outsource a mine). The end of leaded gasoline and lead paint has ended the vast majority of lead exposures for the average person. Strict air traffic controls and intensive government investigation of every single aircraft accident has made commercial aircraft the safest means of transporation in existence. Strict national construction standards for interstate highways has made them the safest roads per mile travelled in the nation. For all its flaws, the FDA's drug approval process has kept countless dangerous drugs off the market.

Bottom Line

Until the American people reflexively understand how regulation has strengthened our economy, and how systemic corporate stupidity is often the norm, both concepts well within the grasp of the average person, the oversimplified mantra of government bad, private business good will continue, Republican policies (regardless of the actual party labels of the proponents) will continue to be adopted, and our economy and the people in it will suffer.

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