Tuesday, November 11, 2008

Creating even more "too big to fail" firms

If the stereotypical Republican economic policy error is pandering to Wall Street, then the Democrat one is pandering to labor (usually organized labor).

Andrew Ross Sorkin of the NYT predicts that, in the name of saving jobs, the Obama administration will approve mergers that it might otherwise have rejected. He bases this on an interview with former Clinton era tormentor (now highly paid Democrat lobbyist) David Boies, who says

“Antitrust theory is theoretical. Losing jobs and plants is real.”

“Preserving jobs and economic stability will be perceived as more important than preserving competition,” Mr. Boies said.
There’s a huge fallacy in this reasoning: we got into this mess because certain companies became “too big to fail,” so the government decided to intervene to prevent them from failing. Some companies that are broken need to fail: if they don’t, taxpayers are providing an indefinite subsidy to enable management, labor or business model pathologies (e.g. autos).

Letting broken companies be gobbled up by their competitors should mean that new management will run these companies better. But it also means the survivor will be bigger and perhaps has to be bailed out at any cost. The progression of Hudson and Nash to AMC to Chrysler (whose next owners are pressuring GM to bail them out) illustrates the progression.

So allowing a merger to form an ever-larger struggling company is creating a bigger problem that’s deferred into the future. There will be another economic downturn five or eight or ten years down the road, when these troubled companies will again go into crisis mode. Or maybe they’ll skip the next crisis, and it will be 15 or 20 years off before the government is asked to bail out a company that’s “too big to fail.”

In politics, this sort of intentionally short-term thinking is called “kick the can down the road.” Politicians hope is that when the problem reappears they will be gone, or if they’re not gone, that no one will remember their culpability in creating the problem. Exhibit A: is Fannie Mae.

The cumulative effect of such creeping corporatism is to eliminate the financial accountability for managers, employees, directors of privately held companies. This would have to be funded by taking ever-more money from taxpayers to prop up politically favored large companies — while keeping the tax and regulatory burden high on the well-run companies that don’t need bailouts. Heck, why don’t we change our name to the United States of France?

The US test (since the days of Teddy Roosevelt) for rejecting a merger has been: will the new company have too much power to hurt customers? The EU standard (since the days of Mario Monti) has been: will the new company have too much power to hurt competitors? (Such concerns are trumped by a second test: will the merger serve national or EU industrial policy goals?)

The 21st century, free-market standard should be: will the new company be “too big to fail”?

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