We tend to be a populist bunch around here, for the most part. I sense that we were a largely Obama-voting audience, and that in these recessionary times, our sympathies reside with the apocryphal "common man." Sometimes it's helpful to have a cogent argument from the other side. (And sometimes your host needs a little breather.) Hence this guest column, just the third or fourth such column I've run in the history of SHAMblog, which has now been in more-or-less continuous operation since June 2005. Just to be clear, this was not written/submitted by any of our by-name regulars. It was actually sent as a response to a question I'd posed: What did this individual think of Obama's plan to cap compensation for executives at bailed-out companies? I thought it was so well-put, touching at least peripherally on so many of the themes we cover, that I requested permission to run it, which the writer graciously gave. I suspect that some of you will have strong feelings about this.
Without further ado, then:
"I am very much a pro-capitalism kind of guy. I have participated fully in the capitalism system—from hitting it big when the company I worked for went public, to watching my seven-figure stock options vaporize to nothing in three weeks. I've been fired, laid-off, bought-out, and have started small businesses which were utter failures. And now I [launched my current business] from scratch, created new jobs and have a $500K payroll [personal compensation excluded].===================================
"Plus, I'm an opinionated SOB by nature; so I've got a few thoughts on this subject.
"If your company has to take bailout funds—money from the government solely to keep your business running and not for any products or services you provide to the government—then the government owns you. You are the President's bitch. The owner gets to make the rules because you have proved too inept to survive on your own. It's no longer capitalism when the government has bailed you out; it's corporate welfare. Even if you are a Harvard MBA, you are still a welfare queen. Capitalists are supposed to make their money through ownership—not salaries. Stock options (equity ownership) are supposed to provide the incentive to really run the company well: When the stock price goes up, the executive shareholder makes the big bucks. It's how Bill Gates got to be worth over $50 billion while drawing a salary of less than $1 million a year. Ditto Warren Buffet. But when the stock is worthless and the taxpayers have to be the owners because investors won't touch you, the rules change.
"Normally, when companies go bankrupt, all sorts of receivers and judges and auditors and mediators get to come in and rewrite contracts, impose limitations of all sorts, and even transfer the ownership from the equity stakeholders (shareholders) to the debt holders, who become the new owners. And since the old stock has become worthless, the stock options—usually a major component of executive compensation—are worthless, too. Usually the old executive team is tossed out and 'turnaround specialists' are brought in to take the company out of bankruptcy.
"With a bailout, bankruptcy is avoided. Most of the old, under-performing executive team is usually allowed to stay on. And until you can pay back all the money, the President, through the administrative branch, gets to set the rules.
"Rule #1: You don't get a bigger salary than the President.
"Rule #2: You've got to give money to ACORN.*
"I don't think this is a new precedent for government intervention. We've had much worse—such as WWII and nationalizing all industry for the war effort. Even patent rights were suspended. A guy named Philo Farnsworth invented the modern television, only to have the U.S. government seize his invention and hand it over to RCA for the war effort.** He died poor and bitter. And today the government gets to determine which businesses they will save: Checker Motors and Studebaker can disappear, but Chrysler gets bailed out. The government now wants to rewrite mortgage terms for borrowers and lenders totally outside the bankruptcy rules that governed the process when the contracts were written. Any wonder why banks aren't in a lending mood right now?
"You had plenty of chances to buy stock in GM and Chrysler, but you chose not to. Now the government has used your taxes to make that investment for you.***
"Those previous examples are dangerous precedents. And the inside-the-beltway crowd wonders why 'The Market' is not responding?
"You've been a college teacher who has seen what happens when 'failure' is outlawed: Kids who should have been weeded out show up in college and they can't write at a 10th-grade level, much less a collegiate level. The standards have been lowered to the point where you, as a teacher, have no confidence in the ability of the incoming class. And the students copped an entitled-to-it mentality that demotivates all who try to maintain standards. Not a good situation at all.
"The same thing has happened in the economy. Banks that loaned money to people with a history of not repaying their obligations have lost billions of dollars. The executives who made those policies are still employed, but the stockholders are wiped out. OK, the executives are now de facto government employees.
"I'm not an Obama fan at all. But this steaming turd pile was left on his desk; he didn't create it. That said, he's going about this clean-up all wrong. The stimulus bill should be scrapped. Bush proved this sort of thing doesn't work—so why is Obama following the failed blueprint? The only way to create jobs is to get people to do the following:
"Getting back to your initial question: there is a price to pay for everything. If you take taxpayer money to keep your ass in business, then you've eliminated your risk—and rewards."
- Take risks by investing in new businesses.
- Stabilize the dollar: Stop printing zillions of them.
- Don't extend unemployment benefits. Paying people for not being productive is dumb; it just delays the hard decision that need to be made (get a new skill; move to a better market; go out on your own...)
- Give incentives to people to create jobs. Maybe let them keep more of what they make?
- The market should determine winners and losers and the value of an individual's skill set, not the government.
- Don't remove the pain from failure. It's a great motivator.
NOTE: If you haven't seen the Bill Gates Net Worth Page, linked above with his name, you should check it out. It's fun, and full of mind-bending financial facts.
* That's called sarcasm, folks, and smartly done, too. But it's rooted in this.
** The precise sequence of events here remains controversial to this day, though it is clear that Farnsworth played a significant role in the birth of television.
*** This is, to me, a powerful line, and worth thinking about.