Looking to gain a competitive edge over smaller, less-connected competitors, the captains of industry invite and encourage government intervention in the free-market economy, then bristle when the government intrudes on their own prerogatives.
For the better part of the last century the trend has been for the lines separating big business and big government to slowly blur as the rights and liberties of individuals and small businesses slowly erode. This trend has accelerated since late 2008 at the onset of the credit crunch – which itself became inevitable after the government insinuated itself in the private sector mortgage business through such measures as the Community Reinvestment Act and the creation of quasi-government companies like Fannie Mae and Freddie Mac.
Now, the Obama Administration is reportedly considering levying a special tax on the nation's largest banks and financial firms to re-coup some of the TARP bailout money for the U.S. Treasury. The furor this has caused on the part of business leaders, coupled with the outrage over last year's special tax on the AIG bonuses is almost as amusing as it is alarming. It is amusing to see the same Wall Street executives who crawled, hat-in-hand, to the federal government for bailout money finally realize what we critics of the legislation had been warning all along: federal largesse always comes with strings attached; and sometimes those strings can strangle those they were ostensibly meant to help.
It is alarming to see how quickly the President and members of congress reacted to the public backlash caused by last year's bonuses by passing a law more chilling (a blatantly unconstitutional bill of attainder which specifically targeted the bonus recipients) than any enacted by congress in recent memory. They are now considering a similarly unconstitutional tax on the banks themselves. This turn of events begs two simple questions: how did we get here? What went wrong?
Our modern banking and finance system can trace its earliest recognizable roots back to the Middle Ages. It was during this time that a coherent and workable system to finance long-distance trade developed to facilitate both pilgrimages to the Holy Land during the Crusades and the exchange of goods between distant and disparate cultures from Western Europe to Asia via the turbulent and dangerous trade routes in the Middle East. For this purpose bills of exchange were issued by entrepreneurial bankers in Italian cities such as Genoa and Florence, and by the mighty order of warrior-monks called the Knights Templar (named for their original role of protecting the church – or temple – of the Holy Sepulcher in Jerusalem) so that a traveler could deposit rather than carry cash or gold and be given a receipt or bill of exchange, before a long and dangerous journey. They could then, upon arriving at their destination, exchange this document for their wealth – minus a transaction fee. It was in this way that our modern system of international finance began.
Later, the role of banking expanded at the dawn of the Industrial Revolution as bankers and financiers were used by industrialists and entrepreneurs to raise capital from investors to start and expand companies which produced tangible goods and provided needed services. The point of all this is that in the beginning, the finance industry served a useful purpose for the broader economy and helped bring about economic opportunity and freedom to a growing middle class.
This, however, is no longer the case. Wall Street no longer represents merely a mutually beneficial meeting place between industry and investors. Instead, thanks to a toxic combination of greed, incompetence, and government meddling, many of Wall Street's best and brightest spend their time cooking up complex and opaque financial instruments such as credit default swaps and derivatives whose primary purpose is to enrich speculators and circumvent taxes, not to finance growth in the broader economy.
This type of activity would be perfectly legitimate in a purely capitalist system under which the basic laws of risk/reward, supply/demand, caveat emptor, laissez faire government, and binding contracts prevailed. Unfortunately, thanks to big-government progressives and corrupt business leaders, our economic system no longer qualifies as capitalist. Instead we've created a grotesque caricature of Adam Smith's vision which bears a greater resemblance to Marx's Communist Manifesto than the Wealth of Nations. What we have now is an insidious amalgam of historically discredited leftist economic and political systems such as socialism and fascism which favors an ever-shrinking cabal of elites in government, business, and labor at the expense of an exhausted middle class groaning under the combined weight of this three-headed leviathan.
The result is a system where a massive and powerful labor union such as the UAW can contribute to the collapse of a once great company like General Motors by piling unsustainable cost obligations on the firm, then use its government connections to bail it out at taxpayer expense. We see a massive and powerful financial firm such as Goldman Sachs flood successive administrations with former executives, and then use this leverage to orchestrate the demise of its two biggest competitors, Bear Stearns and Lehman Brothers, and the bail out of insurer AIG to protect its multi-billion dollar investment during the credit crisis. And we see firms such as General Electric push the government to pass environmental regulations compelling citizens to buy its "green technologies" from energy-efficient light bulbs to windmills.
This type of system first reared its ugly head at the dawn of the "Progressive" era when, for example, the titans of the meat-packing industry pushed the government to establish onerous federal standards on their industry to bankrupt their smaller competitors who could not meet the increasing cost of compliance. It expanded under FDR's New Deal and LBJ's Great Society, with Nixon's wage and price controls and the passage of CRA under Carter. It was briefly and modestly stalled by Ronald Reagan only to re-emerge under Bill Clinton and George W. Bush with such measures as CRA expansion and the Wall Street bailout.
Gone are the days of supply-side economics where a firm endeavors simply to produce a good product at a fair price absent government meddling. Looking to gain a competitive edge over smaller, less-connected competitors, the captains of industry invite and encourage government intervention in the free-market economy, then bristle when the government intrudes on their own prerogatives. We then see ever greater and more intrusive measures by a political establishment seeking greater control of the means of production and wealth creation as a means of re-distribution using the public backlash against corporate excesses as a pretext.
This process is reminiscent of the scene in the movie Goodfellas (scroll ahead to 6:00) where the hapless restaurateur invites the mafia boss (Paulie) to be his partner in order to protect him from the mob's own thug (Tommy). What the businessman did not anticipate was that once they gained an interest in the firm, the mob would systematically destroy it from within while repeating the line, "f-you, pay me." And like a once-legitimate business getting mixed up with the mob, any business that gets in bed with the government is, by definition, the junior partner. Business leaders have only themselves to blame for this mess in which they find themselves.
The only remedy for this problem is for business leaders at all levels to re-dedicate themselves to competitive, free-market principles and forswear any and all government intervention and help and for Republicans, as the center-right party in America, to re-dedicate themselves to the founding principles of limited government and laissez-faire economics. For if current trends continue the legacy of individual liberty the citizens of this country have enjoyed for generations will be crushed by the imploding bulk of this axis of greed comprised of the leaders of big labor, big business, and big government.
Mr.St. Joseph,
I can not disagree with your analysis of the current situation, however I find your remedy naive.
The principle of a “free ” market must be enforced just as a referee manages a football game.
What keeps the NFL game honest is the transparency of the game to all of us via TV.
The Government is the free markets referee but the politicians are on the take.
All proposed legislation must be published in plain language and given ample time be evaluated by us the public.
Sunshine laws have helped clean up local political decisions and should be applied in a practical way for our Congress.
jprairie,
My question is; “Who referees the referee?” Granted that Michael outlined a great case for the rededication of the business leaders to competitive, free market principles; and the foreswearing of all governmental intervention.
Regarding government; it’s not just that politicians are on the take. We have an administration that encourages social justice through the forced redistribution of wealth.
In his essay Michael points out that; “… a massive and powerful labor union such as the UAW can contribute to the collapse of a once great company like General Motors by piling unsustainable cost obligations on the firm, then use its government connections to bail it out at taxpayer expense.” But it’s even worse than that. Not only did the UAW provide the method of ruining GM, they were able to get a complicit administration to turn 150 years of bankruptcy law in its head by ensuring that secured creditors ended up behind the union in the chain of repayment instead of their usual place as first to be paid. The union also ended up as the majority shareholder in the company that emerged from bankruptcy court. Pretty sweet deal, huh?
Now on to the banks. Many of these financial institutions were coerced into borrowing funds they did not need. These banks not only paid back the TARP, but paid interest as well; to the tune of $20 billion. Now the Administration attaches a ‘fee’ on these banks that owe nothing to the taxpayers. Ostensibly, according to the Commander-in-Chief; “If they can afford to pay massive bonuses, they can afford to pay the taxpayer back every penny!” He’s decided to bail out the union owned GM and the government owned AIG, Fannie Mae and Freddie Mac once again by squeezing the banks to ‘pay back every penny’ of the money they don’t owe but the government favored business will never be able to pay back themselves. Some referee!
Bill W.
I agree about the banks and car companies.
The United States citizens through transparency and a real education in political science can monitor the Government referres.
Ignorance is what allows the silliness you described to happen.
Obama and the hard left should pay at the next election.
jprairie,
So the game is rigged? While I’m not certain what your definition of ‘transparency’ is; I feel I’m on fairly solid ground when I say that the overwhelming majority of American citizens are being denied any real education through attendance at government run public schools.
There is overpowering evidence to support the conclusion that the public school curriculum does just about everything but provide an actual education. One could reasonably argue that teaching students to embrace climate change, gender identity studies, social justice, multiculturalism, and non-judgmentalism really fails to prepare students for the workplace, or to monitor government. In fact, you could make a case that the current state of the indoctrination provided to the student bodies of government run schools actually enhances the opportunity of government to enact its agenda of ‘favoritism’ both to companies and groups.
In order to ensure that the people are knowledgeable enough to truly provide oversight of government institutions; you would almost have to favor the abolishment of the Department of Education as a conflict of interest of government.
Does the govt control GE, or does GE control the govt?
Have the “big business” become state owned, or have the govt become privatized?
BW We are on the same page.
The Brown win in Mass. was due to the just in time knowledge the voters got about Obama care. If the election were a month earlier, there probably would not have been enough info (or lack of transparency) in this case to move the voters.
This was a case of Catch 22; The dems hid so much about the plan that the voters got upset.
In general however I can not understand why all congresses proposals are not made public, written in plan language with an adequate time period for citizens to give feedback to their representatives.
I believe all the horse trading should remain private to avoid public posturing like we saw with Obama’s recent televised meeting with the GOP.
However before the actual vote the bill should be transparent for all to evaluate.
Your point on the quality of public education is right on.
It is not in either parties interests to have a well educated populace.Currently the truly ignorant and those believing they can not make it without government help are solidly in the democratic camp.
Question:
We are assuming that given a chance, businesses will reinvest in themselves in order to increase profit. But there are just as many businesses that “take the money and run”, i.e. not invest it (at least for long-term profits). Moreover, there are many businesses and individuals who, when having more money left over after taxes, do not spend/invest it, merely put it away into a bank for the sake of frugality.
I am certainly NOT arguing for more government control, for the simple fact that IT’S NOT THEIR MONEY. Rather, what do you do to encourage reinvestment? I would have thought that simple human self-interest would be compelling enough, but considering the silly way in which the housing/banking industry was loaning money out to anyone with a pulse — albeit to some degree related to yet another Government regulation set up during the Clinton administration to allow for more housing “opportunity” — my faith in selfishness has been weakened.
>Rather, what do you do to encourage reinvestment?
My partners and I created a half dozen business since 2000. Three failed, one was sold at a profit, and one we continue to operate today.
The sixth company was an existing enterprise we invested in to stabilize and expand it. After 2 years it finally began to turn a profit. With the Obama administration’s policies, however, we saw that to be successful meant having our profits taxed away, and to be unsuccessful meant losing money. Either way there was no justification for the continued business “risk”, so we cut our losses and pulled out of the company, allowing it to fail.
We intended to devote all of our activity to the remaining business we operate. However, thanks to new banking regulations, our line of credit was dramatically cut. We made up the missing 7 figure operating reserve we needed last year out of our own pockets.
That business continues to perform very well, but we will not be expanding operations. Rather, until new tax laws and other regulations become clearer to us, we will operate in a holding pattern.
This is the problem: uncertainty and unbalanced regulations, combined with an increasing tax burden, fundamentally affect the risk-reward calculation. Until it makes financial sense to us to grow our current business or invest in new ones, we’ll focus on protecting our resources rather than growing the pie.
Obama has beaten the entrepreneurial spirit out of us. We’d gladly reinvest and grow if it made sense to do so. But we won’t put our money into an enterprise where you lose if you lose, and you lose if you win.
deleeuw,
The real challenge here is that the overwhelming majority of jobs are created by small businesses. Most of those businesses are what are called “S” Corporations. “S” corporations are small businesses owned by people that file the ‘profit & loss’ of business on personal tax returns
If you are a small business owner who files as a “S” corporation and you constantly hear your President calling for higher taxes, but only on those who make more than $250,000; what are you going to do?
You’re going to run your business in such a manner as to stay under that threshold. You are also not going to hire any more people because more people means more production, which means more sales, which means more profits, which means higher taxes.
Why would anyone in his right mind work 14 hours a day 6 days a week to earn $475,000 so he can fork over a larger chunk to Barack Obama to pass out to unemployed people in Michigan?
Maybe work 10 hours a day, four days a week, and take the entire month of December off work (laying off your workforce as well) and only make $200,000 but ‘net’ more for your own family after taxes.
Businesses are in business to make money. Anyone that starts up a company for any other reason is going to fail. History has proven; “If you want less of something, tax it. If you want more of something subsidize it.” So why would our Commander-in-Chief tax business and subsidize welfare programs, huh? Maybe the guy actually wants more dependent citizens and less financially secure citizens. Dependent citizens turn to government, financially secure citizens do not.
Good points, all.
I would like to address the most fundamental of the issues contained in the question, “…what do you do to encourage reinvestment?” That is issue is: government has no authority to act in order to encourage reinvestment. It should do absolutely nothing. Stop uneven taxation, stop punitive regulations, stop marxist redistribution programs, and stop pretending it is the expert in the room.
Mountain Man,
You ask; “…what do you do to encourage reinvestment?” I suppose I’ll fall for the trap and say; “Why not follow the lead of Coolidge, Kennedy, and Reagan and LOWER TAXES! Our 35% corporate tax rate is second highest on the planet!
Most of the companies located in countries we compete with for exports into other countries are paying 23%. That corporate tax rate adds to the cost of goods and places American companies at a disadvantage in foreign markets.
The only way to unleash the economic power of the US is to let those companies and business owners KEEP THEIR MONEY!
I know this goes against the Gospel of Social Justice; but the choice is really simple. Either business is set free to invest, sell, an reinvest; or we spread the misery evenly.
I think Mountain Man hit upon the fundamental point:
Since when is it the Government’s job to “encourage”. So long as we think that is should (or can), every discussion of taxation, which should be based on the notion that taxes should have ONLY the practical purpose of paying for services, decays into one of insidious social engineering, where the Government decides which activity should be encouraged and which should be discourages, using the power of taxation to punish (ex. the use of “sin” taxes). As Justice Marshal noted “the power to tax is the power to destroy”.
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