Dangerous Dan Thoughts and musings on the world

3/17/2009

The Problems of Government Control

Filed under: Politics,Society — Tags: — Dangerous Dan @ 10:37 pm

The latest populist outrage du jour is the $165 million in bonuses AIG paid out to its executives.  Since AIG is a recipient of tens of billions of dollars of taxpayer bailout money meant to shore it up, Obama and other politicians are in full bluster mode about the payouts.  They shouldn't be.  AIG was contractually obligated to pay that money to its employees.  Just because the company gets funds from the federal government doesn't mean that it is suddenly at liberty to violate the terms of its contracts with its workers, whether it's an extra $20 to a guy in the mail room or several million to a vice president.

It's also not as if this suddenly snuck up on anybody.  The White House is claiming they didn't know about the bonuses until earlier this month, but this is likely a CYA move.  It's difficult to believe that the administration didn't have some idea of the extent of the bonuses before official word got to it.  Even if the benefit of the doubt is given, the alternative explanations are either incompetence or shoddy work for, respectively, not thinking to investigate bonuses or going about getting the information slowly.

The problem for AIG if it had cut the bonuses, aside from getting sued by those who were stiffed, is that the business requires skilled, qualified people in its ranks.  It cannot get or retain these individuals if it is unable to match the compensation packages of competing firms.  This is part of a larger worry of mine whenever Obama and other mostly Dems talk about limiting the executive compensation of the companies that have received federal relief.  That sounds quite nice but such a policy puts the businesses at a serious competitive disadvantage for personnel.  If you're a skilled corporate manager, salesman, broker, etc., and you have the opportunity to make, say, ten times as much money at one firm than at another, the choice is obvious – you go to where you can make big money.  The firm that is legally unable to match salary and bonuses will increasingly get less qualified workers, i.e. the leftovers after all the other firms have picked over the available labor pool.  Considering these companies are already troubled (that's why they got federal money to begin with), this will only exacerbate the troubles.  Rather than use taxpayer money appropriately (something I consider was already not done in bailing them out at all), the politicians will waste that money by creating a non-competitive company that cannot succeed against rivals and will either go down with that taxpayer money or it will keep demanding more to keep it afloat.

This last option is a worrisome one.  There's a decent chance the government will continue pumping money into failing companies only because it has already sunk so much into them.  No politician wants to admit AIG or some other entity is going to go down in flames with billions in taxpayer money never to repaid.  The pols would rather keep propping it up as long as possible, a bit like the gambler who keeps gambling because he's already "invested" so much cash and holds out a futile hope of getting it back and keeping his wife from divorcing him.

So what would become of such companies?  That they become wholly dependent and functioning arms of the federal government?  This would certainly seem to be the case.  One of the lines the American people were given during the initial round of bailouts is that the government was buying stock without voting power and the banks, firms, and companies would not be controlled.  Not surprisingly, that didn't last long.  The fool populists now feel at liberty to exert ever greater control on these businesses, always on the justification that the companies received federal funds and the politicians, never good stewards of taxpayer money in their own spending, must ensure the U.S. investment is being used appropriately.  So far, only executive compensation packages are targeted, but there's no reason to stop there – not given the above justification.  What if a bailed out bank wants to foreclose on a number of houses owned by the poor, or refuses to lend to the "disadvantaged," or does business with the politically unpopular (let's say, a whaling group or a questionable foreign regime)?  There seems little to stop the pols from declaring that the bank needs to act correctly – that is, to act according to what the legislators have determined is politically advantageous or socially right – because, as a recipient of taxpayer money, it owes the taxpayers its subservience.

And what of that?  Doesn't a company owe obedience to the wishes of its investors and stockholders?  Of course, but what is the nature of this investment?  Ordinarily, I voluntarily invest my own money in a company and take on the risk should the company fail.  I can also voice my displeasure with the company's actions and try to direct it to act differently according to what I think is the best course of action.  None of this is the case with the government bailouts, however.  My money is being invested in companies regardless of my wishes.  Politicians are investing it for me, and against my will.  The pols also risk no monetary capital of their own should the investment go poorly.  All they risk is nebulous political capital, which can still be salvaged in case of failure.  I also have no say, as an investor, in the direction of the companies.  Instead, those same politicians act as my intermediary.  But the interests of those politicians are, again, less profit and more political (remember what it is they have at risk).  If it is political gains those pols wish to make, then they will pander to the poorer majority.  Since many of the poorer majority do not pay income taxes, they haven't any money at risk in these government investments.  The result is that my money is invested, but that investment is controlled by politicians for the benefit of those who have invested nothing.

Let's bail out all sorts of business entities.  Other than loss of taxpayer money, effective nationalization of companies, destruction of normal competition, and a bizarre distortion of investor-company relationships, what could go wrong?

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