Monday, March 30, 2009

The Dilemma of Public Risk, Public Reward

Normally, it would be considered an honour to be asked a question by one of the world's top academics.

That is, unless the question isn't really a question at all, but rather a thinly-veiled criticism. That was the case at a recent Council of Foreign Relations conference in New York, as Benjamin Barber addressed a question to US Secretary of the Treasury Tim Geithner regarding who will profit from the publicly-funded bailouts being assembled for various large companies.

The controversy surrounding this has reached a fever pitch lately in the wake of revelations that AIG was poised to use bail out funds to pay bonuses to their executives.

At a time when public funds are so clearly being misappropriated for private profit, one can count on Barber -- one of the world's top democratic thinkers, who has offered cogent criticisms on capitalism's effect on democracy -- to take a stand on the issue.

"I'm a political theorist, not an economist," Barber begins. "When I teach the theory of capitalism it suggests that profit is the reward for risk."

"What seems to have happened recently is that whenever someone talks about nationalizing the banks people scream 'socialism' but the current administration seems to be wanting to socialize risk but keep profits private," Barber explains. "That seems to be the new capitalism in the United States, where the taxpayers take a lot of the risk but the market continues to enjoy profit should there be any. The real question is whether there are mechanisms to allow, if taxpayers are going to take the risk, for them to enjoy all, not some of, the profits rather than a system in which you're trying to revive the markets on the taxpayer's back."

Geithner explains that, whenever markets are unwilling to take risks, the government is obligated to do so in order to help repair the damage.

Geithner also rejects the idea that the government should accept all the risks, and suffer all the losses, forthcoming from such an effort. But to Geithner, it seems that the reward for accepting these risks is what he describes as a "firmer foundation for repair".

It's easy to fall into the trap of thinking of profit merely in monetary terms. There are important other ways in which the public could profit from these bailouts, particularly in terms of economic and job security.

One would expect that, in a capitalist economy, the government wouldn't have to use a potential bailout as leverage in order to prevent business executives from making stupid decisions. One of the most important conditions for a bailout of any industry -- particularly the automotive industry -- is that the continuing exodus of jobs overseas has to be halted.

For the average business executive, this shouldn't be a difficult concept to understand. Certainly, an automotive company that ships its jobs to markets in the developing world reduces its cost of production.

But it does leave behind, on a continuing basis, thousands upon thousands of people who can no longer afford to purchase their product. When one slowly decimates their own market in the quest for lower and lower production costs -- and higher and higher profits -- the business model has clearly committed itself to a self-destructive cycle.

Stopping that exodus of jobs overseas may require autoworkers' unions to renegotiate the extremely generous collective agreements they've negotiated with carmakers over the past several years. Some concessions have been made already, but the restructuring effort hasn't gone far enough.

It's important to remember that the automakers themselves aren't the only private interest involved in bailing out automakers. Unions often disguise themselves as public interests very effectively, but at the end of the day each and every individual union represents a comparatively small and limited group of people.

Unions must also share in the risk that, if they make concessions, conditions may never improve to the point where those concessions can be profitably reciprocated.

By the same token, however, the government must ensure that it legally obligates carmakers to reciprocate any concessions made by unions should their companies ever return to profitable status.

Episodes in which unions make concessions to companies who later unilaterally refuse to reciprocate them cannot be tolerated. An undeniable role of any government is to ensure that they cannot do such things with impunity.

Once again, such behaviour becomes a problem for companies that, in the future, may have to go back to their unions in search of further concessions. With the memory of past screwjobs firmly in memory, such companies shouldn't expect concessions.

As before, no one should expect that the government would have to legislate in order to prevent such companies from shooting themselves in the foot. Then again, there is too often a massive difference in life between what should be and what actually is.

As it regards the potential nationalization of banks, those in favour of such a move must recognize the fact that if the government nationalizes significant portions of the financial sector it will have to accept all the risk related to those sectors.

While the public should be able to reap all the rewards, it would also have to absorb all the losses.

This is one of the best reasons to keep government and commerce as far apart as efficiently regulated markets and industries will allow.


  1. Very insightful post, Patrick.

    While I don't want to seem like a socialist here, it drives me crazy when so many of our conservative columinsts, business leaders and intellectuals call for more corporate tax cuts and deregulation, of letting the market look after itself, and telling the government to get off their backs...only to come back and say that the government should be bailing them out with taxpayers' money-money that was significantly depleted with all the tax cuts they called for.

    In short, they expect to be left alone except when things start to go wrong, then they come back and ask for help.

    In some ways, it seems like markets and the private sector can do no wrong, but the government can do no right. If the government doesn't deregulate and cut taxes the way the private sector wants, it's construed as socialist and anti-business. But at the same time, if it doesn't do something to help when times go bad, it's accused of standing idly by...when the mantra has always seemed to be that the market should work these issues out for itself.

    By the same token, when the economy is firing on all cylinders and everything is going well, then private enterprise takes the credit. But when things start to go bad, as they currently have now, they rarely seem to accept any part of the blame.

  2. The demand for complete deregulation is an ideological dead end. There's no question about that.

    What we need is an optimal level of regulation that falls far short of the planned economy, but still ensures that a financial crisis like this cannot reoccur.


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