“The business of America is business,” said Calvin Coolidge, a few years before the Great Depression. In the worst economic downturn since then, Barack Obama won the White House after a campaign in which he made it clear, to what might be described as populist delight, that he was not a friend to corporations. In what was probably his most closely followed (and generally praised) speech, given in Philadelphia on March 18, 2008, he singled out one group for particular condemnation:
Just as black anger often proved counterproductive, so have these white resentments distracted attention from the real culprits of the middle class squeeze—a corporate culture rife with inside dealing, questionable accounting practices, and short-term greed; a Washington dominated by lobbyists and special interests; economic policies that favor the few over the many.
Here was a view of business and corporations fit for pure demagoguery—the suggestion that the country’s current financial woes are owing to trading on inside information, deceptive accounting, and the profit motive itself. This was made even clearer toward the end of that speech, as candidate Obama suggested what he thought all Americans ought to be discussing as they chose the next president:
This time we want to talk about the shuttered mills that once provided a decent life for men and women of every race, and the homes for sale that once belonged to Americans from every religion, every region, every walk of life. This time we want to talk about the fact that the real problem is not that someone who doesn’t look like you might take your job; it’s that the corporation you work for will ship it overseas for nothing more than a profit.
Those who sought a profit, then, were the real miscreants responsible for the nation’s ills—mortgages that could not be paid, mills that were shuttered, jobs that were lost. Those interested in profits were not interested in the general welfare; they were “the few” who were dominating the political scene, and it would be the job of an Obama administration to shift the government from favoring their interests to favoring those of “the many,” which presumably meant the American people themselves. This idea is very much of a piece with Mr. Obama’s unguarded comment to “Joe the Plumber” that “right now everybody’s so pinched that business is bad for everybody, and I think when you spread the wealth around, it’s good for everybody.” Candidate Obama was running on a platform of redistribution, from the few to the many. From corporations and businessmen to the common man. What, then, to make of the fact that in its most recent economic moves the Obama administration is doing nothing less than seeking to take over at least some of the corporations themselves? Presumably the administration is not concerned with profits but with something else.
For example, the federal government now has a large stake in General Motors and Chrysler, but its chief goals appear to be to create the most jobs for members of the autoworkers union, which will also have a substantial ownership stake, and to manufacture vehicles that will be more fuel-efficient and environmentally friendly. These might be worthy goals, but they are not likely to produce the kind of cars that American consumers will be most willing to buy, and the long-term prospects for the success of these companies is not good.
In our legal tradition, a corporation’s primary duty is to generate return for shareholders, and it is alien to that tradition to have our corporations conscripted to serve other goals. Admittedly, there are elements of our tradition that restrain the profit motive. Our law of competition, for example, has given the federal government the power to stop anticompetitive action on the part of corporations, and the Sherman Antitrust Act makes it criminal to enter into any agreement that restrains trade; thus, price fixing, pooling agreements, and other forms of controlling the market in goods, services, or commodities are subject to civil and criminal penalties. Generally speaking, however, it was the practice of the Bush administration not to be particularly zealous in pursuing prosecution of those who ran afoul of these laws, preferring to let the market itself discipline market players.
Not so the Obama administration, which has signaled that it will seek rigorously to enforce the antitrust laws, particularly against telecom companies and airlines. The airlines are just beginning to perform profitably after years of diminished revenues, and the telecom industry is one of the most efficient in terms of offering consumers multiple choices of providers and a myriad of products. Thus, the Obama administration seems to be driven by an ideology averse to business, or at least to the free market. Indeed, the Wall Street Journal has speculated that the Obama administration’s rigorous antitrust policy will drive the airlines into bankruptcy, after which they will emerge as another government-run business.
What may be fueling this administration’s actions is a simple belief that government can do a better job of running the economy and business than private entities can. This is not surprising when such establishment figures as Alan Greenspan have declared that the recent meltdown is a clear failure of capitalism, or when Judge Richard Posner can similarly conclude that he underestimated the manner in which individuals can perform reasonably in the market.
But what if it was government regulation (or interference) that caused the meltdown? No one seems to know for certain, and most on the left (and even some on the right) probably cling to the notion that it is impersonal markets or capitalism itself that failed us. Barack Obama has a stock villain. As he put it in his prepared remarks for a speech in La Crosse, Wisconsin, in October 2008, it was the “greed and irresponsibility” of “Wall Street executives” that “got us into this mess.”
The recent collapse of financial institutions occurred, everyone seems to agree, when huge numbers of mortgages that had been granted to those who really could not afford them went into default. Those mortgages had been sliced and diced and repackaged and sold as derivatives until they represented several trillion dollars of investments. Purportedly, the value of those derivative financial instruments had been secured by credit-default swaps, which theoretically spread the risk of failure of the underlying mortgages. The scale of these mortgage failures was much greater than anyone anticipated, however, and the credit-default swaps simply proved inadequate.
Many of these vulnerable mortgages were written under pressure of the Clinton-era Community Reinvestment Act, which may have made it inevitable that lenders would go too far in allowing low-income borrowers to borrow beyond their means, at least if real-estate values failed to maintain their unprecedented upward trajectory. The unwise, politically inspired pressure to write vulnerable mortgages was coupled with federally mandated “mark to market” accounting, which required lenders to write down the value of their assets, and that combination triggered requirements of the securing of additional capital, which accelerated a credit crunch, and—presto!—the meltdown was on.
Today, many recognize that some of the key provisions of the Bush-era Sarbanes-Oxley Act (2002), including “mark to market” accounting, have been harmful, and the federal government has taken steps to reverse some of the act’s worst elements. But Sarbanes-Oxley itself was an unwise knee-jerk reaction by those who believe that greed, chicanery, and financial shenanigans would disappear, if only the right piece of legislation were put in place. It has never been so, and it never will be; miscreants will inevitably seek to harm others, to take advantage of them, and the gullible will fall for their schemes. There is perfectly adequate state law and a perfectly adequate corpus of federal securities law to allow such wrongdoers to be prosecuted and their victims compensated, and additional measures such as Sarbanes-Oxley do nothing but raise the costs of doing business to everyone.
An economy runs on promises, on reliance, and on certainty, and, most of all, an economy runs pursuant to the rule of law in which commercial relationships among the parties are settled according to previous precedent and statutory directive. Businessmen understand this and order their lives accordingly. Coolidge got it, but most politicians do not. For them the most important thing is rewarding the constituency that keeps them in office, and the rule of law and settled expectations among businessmen is not a high priority. It certainly is not a high priority among Democrats, whose core constituencies are not small-business owners or the inventive entrepreneurs who keep the economy vital. Until recently, they were the mainstay of the Republicans, the heirs of Coolidge.
It is no surprise, then, that when Chrysler and GM emerged from bankruptcy, in a highly unorthodox and speedy series of procedures that ran afoul of the spirit if not the letter of the priorities established under bankruptcy law, the UAW ended up in a better position than the bondholders, the creditors of those companies. Orthodox bankruptcy law would have reversed that preference, but unions are a mighty force in the Democratic Party. Sensible creditors will now be even more cautious about lending to troubled industries, lest they be given short shrift in bankruptcy proceedings that are under the influence of politicians eager to protect party favorites.
Even before the Obama administration took power, we had something like socialism through the back door. Ownership in the great American corporations was dispersed to nearly all Americans through direct investment in shares of individual corporations and in mutual funds, union pension funds, and retirement plans, and indirect investment vis-à-vis attending endowed universities and participating in other institutions which invested. This arrangement brought our nation the greatest prosperity known to man, but it also brought economic dislocations and an unequal distribution of income. That is the price of capitalism and the private ownership of property. Those skeptical of the free market, those who cling to the idea that “spreading the wealth” can work in a way it never has before, are now in charge, and they seek to use the former engines of our prosperity to further their idealistic schemes.
That whirring noise is Silent Cal spinning in his grave.