4.23.2012

Corporate Cronyism and Government Protectionism

In a free market economy, like minded individuals come together and 'incorporate,' i.e.,  collectively work together to deliver value to a marketplace. This kind of corporation is subject to the response of its market and the competitive forces of other corporations that choose to operate in its space. Modulo investment to start the corporation, both in money and sweat equity, and that used to sustain the operation until it achieves profitability, a corporation succeeds or fails by its ability to deliver value and retain a profit. This is the essence of capitalistic enterprise - the free association and free marketing of products, services, and ideas. 

If a competitor does likewise, but more efficiently, i.e., at lower cost - it has the potential to capture a greater share of the target market, and displace any less efficient competitor. In a robust marketplace inhabited by more than a couple of competitors, a displacement by a strong competitor may not only further reduce the profitability of any of the others, but drive one or more out of business. Any of these market actors could (and should) find themselves out of business if they fail to address inefficiency, or worse, blunder with their financial decisions, like take on unsustainable debt, miss schedules, or deliver shoddy quality products. If they fail, any resources that remain will then be awarded to their creditors, investors, or both.

In a free market economy, one witnesses this behavior frequently. When a company goes bust, its residual assets are acquired by banks, sold to liquidators, even acquired by competitors so creditors can be paid. Employees go to work elsewhere, hopefully for a less hapless or unlucky management than their previous position. The marketplace of customers gain by lower cost products, superior service, or other benefits they, the market (not the government) value.

When the Government intervenes in this natural selection, always for a myriad of ‘good’ reasons - the dynamics of a free market, and the drive to ever increasing efficiency is halted. Corporate officials, rather than finding themselves out of work for their incompetence, are frequently rewarded by their boards ‘for saving the company.’ But what has been saved? A brief enumeration would have to include the same decision makers who drove the company into the ground, the same inefficient processes that yielded product and market failure, and the same lack of market market receptivity.

What has been gained by Government intervention in economic affairs? A new constituency beholden to its Government benefactors, i.e. the politicians that supported its ‘bailout’ plan. When the reconstituted company fails again - it is more likely to be bailed out a second (or third, or …) time*. 

As opposed to the free market, Government action is dictated by political sentiment, not fiscal reality. The Government, in for a penny, will go in for the pound so as to keep the now protected enterprise solvent*. The Government (and the politicians that represent it) will go back-to-the well in order to justify the initial ‘investment.’ They will go on about ‘protecting livelihoods, business, and jobs, when all the Government has really accomplished is the support of inefficiency and higher prices, and blocked workers from obtaining more rewarding employment in vibrant and growing enterprises. In short, Government intervention has rewarded failure and created a new protected class, gaining for itself a new constituency that perceives Government intervention as necessary for its financial health.

Such a system of Government protectionism is self-perpetuating. It creates a frail economic edifice that demand ever increasing ‘protection.’ It fashions itself as the ‘savior’ of the economy. As protected industries ‘blow up,’ the government steps in to ‘bring stability to the markets.’

Once the Government becomes a corporate ‘protector,’ its corporate ‘client’ is removed from the dynamics of a healthy economy. The corporation no longer ‘lives’ to deliver value to its market, but rather to maintain its ‘favored son’ status to the State. Both State and Vassal become parties to a type of cronyism and concentration of power that the Tea Party and Occupy movements can only rail against. Without concerted effort or a major (catastrophic?) correction - this system of cronyism is self-perpetuating and biased towards ever greater State control of the economy. Government sponsored corporate cronyism is not capitalism of any kind. It is the pre-cursor of an increasingly socialized economy.

The only antidote to this trend of increasing government protected economy, is the excision of government from corporate operations and vice versa. The asymmetry of this problem stems from corporations (and their officers) seeking shelter from their intended market while maintaining the privilege of their office. The benefit for the State is increased control, i.e. power, over the engines of the economy. I’m reminded to the years between WW1 and II. It seems we’ve seen this behavior before, and the results then weren’t pretty.

Corporations that are focused on delivering value to their customers, who aren’t protected by their Government from competitive pressure, and who are directly accountable and impacted (financially) by their actions - should be allowed to succeed or fail on their own merits alone.

The point is simple. If you believe corporations are too big, have too much power - then you might consider supporting candidates this election season who don’t believe any economic entity is ‘too large to fail,’ who support reducing Government’s role in the economy and in protecting selected corporations to the detriment of all others.

*Chrysler corporation is just one example that illustrates the point. Chrysler’s first Government bailout was a $1.5 Billion load package delivered as the Chrysler Corporation Loan Guarantee Act of 1979*. The next Government bailout was delivered to Chrysler by the Bush administration in December of 2008 to the tune of $4 Billion dollars, followed early in Obama’s first year by an additional $8.5B, with an addition $1.5B delivered to Chrysler’s credit arm. In total - Chrysler was provided $15B in loan guarantees (taxpayers on the hook). To be fair, the 1979 Bailout, backed by the US Treasury was repaid in full by 1983 - four years later.

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