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March 1, 2012 / Sandy Asher

AMERICAN CAPITALISM: MOVING BEYOND BLIND FAITH — PART 2

WHILE THE CAT’S AWAY

We continue our examination of American economics with another metaphor involving rodents:  While the cat’s away (deregulation), the mice will play.  Small mice may try to scam food stamp limitations by purchasing a meatball sandwich, not on the list of allowed items.  Medium-sized mice might pay under-the-table salaries to illegal nannies.  Really big mice gobble up everything in sight.

Fortunately, though often reluctantly, our free market eventually accedes to pressures to temper many of its harmful practices.  History tells us that the cat can be lured home, difficult though it may be to herd cats, with bait set by government, big business, and the rest of us.

As discussed here in Part I, Adam Smith laid out the model for capitalism’s strengths in his book The Wealth of Nations, published in 1776. His commentary significantly underestimated the skullduggery of the very wealthy when given the opportunity to run free, a miscalculation echoed by contemporary worshippers of the free market.  Alan Greenspan, former head of the Federal Reserve, was among those who assumed that “the self-interest of organizations, specifically banks and others, was such as they were best capable of protecting their shareholders and their equity in the firms.” When the housing bubble burst in 2008, Greenspan expressed shock that his presumption did not pan out. 

Alexander Hamilton, who served as the new nation’s Secretary of the Treasury from 1789 to 1795, would not have been so surprised. He understood the strengths and weaknesses of business leaders:  “ . . . that valuable class of citizens forms too important an organ of the general weal not to claim every practicable and reasonable exemption and indulgence.”  Left unchecked, however, “. . . their desire for lucre could shade over into noxious greed.”  

The question for Hamilton was how to get rapacious predators—shady captains of industry and finance—to moderate exclusive pursuit of their own desires and subsume those desires to the public interest. 

We’re still wrestling with that question.

Hamilton’s answer was to give them a stake in a government that promoted their interests sufficiently, but not mindlessly, so their awareness would reach beyond profits to the common good, and they would use some of their fortune for civic causes. 

To encourage business leaders not to undermine the national government by financial shenanigans, Hamilton urged funding the national debt at face value, to the delight of speculators who had purchased government securities dirt cheap during the War forIndependence and could now sell them at considerable profit.  He also sponsored tariffs to protect infant industries (resulting in higher consumer prices), gave direct subsidies to assist businessmen for startup costs, and chartered the Bank of the United States (essentially a private bank buttressed by public authority) as a dispenser of capital.             

Government generosity toward business has dominated our country’s economic history ever since. In the 1800s, it funded public works infrastructures (i.e., the Erie Canal), defraying the staggering building costs for private capital. Protective tariffs, cheap land sales to railroad companies, and tight money policies gave creditors the advantage over debtors.  More recent favoritism has allowed a few dominant providers to control most of the broadband landscape (the cables and the wireless spectrum).

In the late 19th and early 20th centuries, the national government frequently sent troops to put down strikes.  President Grover Cleveland, for instance, dispatched the army to enforce compliance with a court injunction prohibiting the 1894 Pullman Strike.

Then, as now, alliances between government and big business were neither conspiratorial nor uniform. They represented shared assumptions that what was good for big business was good for the United States. They also reflected the rotation from business (later corporate) boardrooms to government corridors that left the same people in charge of both making and enforcing policy.

Our national reverence for free markets and individual achievement often means that when the economy goes sour, most of the blame falls on government policies:  misguided government decisions, for example, that maintain artificially low interest rates and allow massive infusions of foreign capital from abroad; irresponsible tax cuts; ruinously expensive wars; and the disarming of regulations that should have curbed highly complex, unsupervised, extremely high risk mortgages pushed on loan applicants who couldn’t afford them.  

Focusing too much on government miscalculation, however, minimizes corporate and individual blame.  It was private, unregulated corporate investors, for instance (i.e. Countrywide Mortgage), not the government-funded Fannie Mae or Freddie Mac, who underwrote the vast majority of bad loans between 2001 and 2007, and sold most of them to Wall Street where they were bundled into confoundingly complicated packages.

Unregulated markets cut greed a very wide swath. In the quest for profits, corporations cut corners, sometimes at great cost to the public interest and safety. In the 1970s, for instance, Ford Motors was aware that Pintos were subject to gas-tank explosions when hit in the rear.  Rather than fixing the problem by adding a small plastic protective casing to the tank, Ford chose the less expensive option of defending itself in court when sued over fatalities caused by the vehicles. Today, voluntary manufacturer recalls for defective products are often slow in coming.

What has led so many major financial players to engage in borderline, if not outright criminal, practices? Why have they also humiliated underlings, undermined co-workers, and displayed indifference to their customers—in short, swarmed like voracious rodents?

Some blame a culture that focuses solely on profit maximization, the kind of environment where, as former New York Giant manager Leo Durocher said about baseball players, “Nice guys finish last.”   On the field and in corporate boardrooms, second place is not good enough. 

Others point to personality types prone to aggressiveness, risk taking, self-promotion, and harassment who gravitate to workplaces where those qualities are seen as assets. They thrive in an environment where, as described by best-selling author Michael Lewis, “. . . goodness was not taken into account on the trading floor. It was neither rewarded nor punished. It just was. Or it wasn’t.”

Moreover, unless the actions taken are blatantly illegal, most connivers get off with little more than a slap on the wrist. The list of recent rule breakers and benders is lengthy:  Madoff, Keating, Milkin, Lay, Skilling, Enron, Tyco, Health South Corporation, AOL Time Warner, Global Crossing, WorldCom (now MCI), Adelphia, Goldman Sachs . . . . Some shady characters did go to jail, and some corporations (that were left solvent) have paid hefty fines for their transgressions. But not a single senior executive whose firms brought on the mortgage crisis of 2008 has yet to be charged with a crime by the Justice Department or by a civil suit brought by the Securities Exchange Commission.

Today’s culprits have company that spans the centuries:  In 1792, the speculative activities of William Duer, a former member of the Continental Congress, led to a colossal securities market crash.  Shady manipulations by financiers John Fiske and Jay Gould to corner the gold market on the New York Stock Exchange caused the panic of  Black Friday of September 24, 1869.   Around 1920, Charles Ponzi’s promise to pay 50%  returns in 45 days allowed him to pocket millions of dollars, mostly from poor Italian immigrants.   Hence, the term “Ponzi scheme.”

Questionable government decisions and greedy big business share culpability for our nation’s financial woes.  But that doesn’t let the rest of us off the hook.  Reckless consumer spending has also played its part in the economy’s decline.  No one forces any of us to buy more than we need or to accept mortgage terms that are blatantly too good to be true. 

As with business hijinks, the temptation for individuals to spend beyond their means is nothing new.  Thomas Jefferson, during his stays inFrance between 1784 and 1789, went on lavish spending sprees. Monticello became a repository, more like a warehouse, for busts by French sculptor Jean-Antoine Houdon, including the very flattering one of Jefferson himself.  Jefferson’s collections, according to biographer Joseph Ellis, also included “Indian headdresses, mahogany tables brimming over with multiple sets of porcelain and silver candlesticks, wall-to-wall portraits and prints and damask hangings and full-length gilt-frame mirrors.”  In his twilight years, Jefferson paid off his debts by selling the estate he inherited from his wife, along with the slaves who resided and worked there.

The federal government can temper, at least for a while, undesirable or dangerous practices by providing appropriate guidelines and exercising watchdog functions. The Pure Food and Drug Act and the Meat Inspection Act (1906) prohibited unhealthy and dangerous meat-processing procedures, the Glass-Steagal Act (1933) separated commercial and investment banking, and the Dodd-Frank Bill of 2009 created a bureau to protect consumers from financial fraud.

Government programs face charges of being inefficient, and not only because of the large bureaucracies and high administrative costs. The inherent difficulty is that within the government sector, prices do not reflect the value, costs, and benefits of the programs because they are not market-based but need-determined.  Nevertheless, the need is real.  (Private ventures are not always paragons of efficiency, either.)

However, stand-alone government programs, irrespective of their cost, success, and efficiency – i.e., Food Stamps, Earned Income Tax Credits, Social Security, Medicare, and Prescription Drug Coverage – provide services that are not sufficiently profitable to attract private capital, or would overwhelm the capacity of private charities. “Entitlement programs” is a misleading term for helping those in need with aid that helps preserve the stability of the free market, contains potential serious unrest, and allows citizens to stay in the game and contribute to the economy. 

As for business’s role in keeping excesses in check, we need to remember that most business people are honest and work hard to provide products and services to their customers.  This is most obvious in small businesses where transactions tend to be more personal. We rarely stage protest marches against our local hair stylist, pub, or dry cleaner.

It’s easy to be more cynical about large businesses becoming socially and environmentally responsible, but their efforts do represent a shift in orientation.  The CEOs of Wal-Mart, Intel, AT&T, and other megabusinesses recently met with union leaders and issued a joint statement calling for quality affordable health care for all Americans.  In conjunction with Humana, Wal-Mart offered one of the lowest priced drug prescription plans in the country.  Companies like GM, Honda, and Boeing boast of plants that have achieved near zero-landfill status.

Can such efforts be written off as just another business ploy?  Yes and no.  Companies change when it engenders good publicity and a reputation for corporate citizenship, but what they do must be economically sound as well.  DuPont’s initiatives in slashing greenhouse gas emissions saved the company $3 billion, turning its environmental efforts into a way of increasing revenues.   That’s good business!

Small groups can also influence business practices. The Sisters of St. Francis, in Philadelphia, have used their investments in retirement funds to buy the minimum number of shares required to submit resolutions at annual shareholder’s meetings. They’ve met with executives from McDonald’s over childhood obesity, Wells Fargo about lending practices, and GE on its building nuclear weapons. Though there is no acknowledged cause and effect, McDonald’s now makes healthier Happy Meals.

Other bottom-up groups that have exercised economic clout through their activities and messages include political action committees like the Tea Party, land preservation organizations, and Occupy Wall Street protests. Their reach can move from the local to the national, and sometimes the international, arena.

Then there are the efforts of individuals, magnified these days by social media.  Molly Katchpole, a 23-year-old part-time nanny, launched an online petition that garnered 300,000 signatures and played a critical role in forcing Bank of America to end a planned $5 monthly fee for checking accounts.  When Citibank announced usage fees for debit card holders, irate customers responded with hundreds of thousands of signatures over the Internet.  Citibank, too, beat a hasty retreat.

Action at the local level begun by ordinary people concerned about the stuff of their daily lives can also modify the free market. Growing health consciousness has led groceries to carry organic foods and fast-food chains to add healthy meal choices to their menus.

Its many faults notwithstanding, over the long run American capitalism has proved adaptable enough, when confronted by critics from above and below, to change enough to keep that criticism from mushrooming into an attack on the system itself.

But there is no “us” and “them” when it comes to modifying capitalism for the better.  Government, Wall Street, businesses big and small, and the rest of us are all part of the system, albeit not equal in power to beget problems or rectify them.

We can lure the cat home – or not — by the officials we elect and the elected officials we become, by the businesses we patronize and the businesses we run, by a host of daily, personal choices:  earn a living honestly or amass a fortune greedily; gather what we need or accumulate what we want; horde, steal, flaunt, or share.

It’s our cat.

 

SOME SOURCES AND RESOURCES

Michael Lewis, Liar’s Poker, W.W. Norton, 2010.

Menzie D. Chinn and Jeffry A. Frieden, Lost Decades: The Making of America’s Debt Crisis and the Long Recovery, W.W. Norton, 2011.

Gretchen Morgenson and Joshua Rosner, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Armageddon, Times Book:New York, 2011.

For those wanting to see expansive coverage of individuals and small groups working to discover their power to effect civic-minded changes, YES! Magazine is an excellent source:  http://www.yesmagazine.org.

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4 Comments

Leave a Comment
  1. Robin Koontz / Mar 4 2012 3:47 am

    Great explanations, and as always, a positive take on all the B.S. going on that can be so very discouraging. I especially enjoy the comparisons to history. Will we ever learn from it? Apparently not.

    • Harvey Asher / Mar 4 2012 9:21 pm

      Always good to hear from you, Robin. We do learn from history, but not enough. And slowly.

  2. bob esbenshade / Mar 17 2012 8:48 pm

    Here kitty kitty……..

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