This is the third of three posts that takes a look at the current global economic crisis:
Part I – looks at historical crises and the solutions employed and the trends that led to the current crisis;
Part II –looks at the solutions for the current crisis;
Part III – this post looks at the bailing out of big business and whether we’re going at this the right way.
In Part II I referenced a need to focus less on growth as a positive means of rebuilding our economy. I acknowledge this is a somewhat controversial stance. In a market-driven society competitiveness is essential to ensuring innovation, wealth and the efficient allocation of resources. Deficiencies in any of those three create burdensome problems for a state in ensuring quality of life for its people. However competitiveness inherently requires growth. Otherwise, how else do you know if you’re winning in an economy if not by making more money than your competitors? Aye, there’s the rub. In our embrace of capitalist markets and refutation of equalizing socialist economies, we’ve become obsessed with the idea that more is better. Of course, this is true to a large extent, but when taken to its ultimate ends it proves to be unsustainable. We will do ourselves more good if we change the lens in which we look at corporate success in North America. I’ll take this moment to make my obligatory qualification that I am not an economist (after that opening, you’re probably laughing and saying, “yeah, no kidding.”) and I invite any and all feedback on my observations and suggestions.
My take on the roll of growth and how we build a sustainable and stable economy is a way of introduction to whether the bailout of big companies is a good idea or not. The failure of the likes of AIG, Lehman Brothers and now the big three American automotive companies has made this a pressing question. Other countries will invariably face the same question as their mega-companies struggle through a prolonged downturn. The question of bailouts is largely a political one since from a free market perspective companies must be allowed to fail to ensure innovation, efficiency and competitiveness. Therefore bailing out companies is about saving jobs or sustaining international competitiveness in a particular market, industry or just in general terms of reputation. In the end, this question will be answered by political climate, the depth of pain resulting from corporate failure, and the weighing of the costs of propping up the company versus helping the unemployed that will result or in investing in a form of stimulus. To be clear, bailouts are not a form of stimulus, it’s about maintaining the status quo and in many cases about setting both the company and the economy back.
So the answer on bailouts will be answered on a company-by-company basis. Due to the nature of this crisis and the central issue of credit scarcity, having AIG and other financial companies go down would have been catastrophic to the US’ domestic economy as well as institutions around the world. However, the US automakers don’t involve the same sort of risks, just a loss of American prestige, pride and jobs. Initial indications are that these are too sensitive at this point in time and they’ll be saved. In Canada, a precarious Harper can’t afford to lose votes in Ontario so the money is forthcoming. Other industries and companies will have to wait and see if they rank as high or whether they can win a “fairness” argument – as in, the government can’t pick winners and losers, if one is saved then all have to be saved.
So let me return to the growth issue, as it’s behind questions that have been bugging me. If these companies have become too big to fail, what have we gained in having such massive corporations? If GDP growth and accumulation of wealth through real estate and stock markets can be erased in a matter of hours, days or months as soon as the system is destabilized, how secure are we in our quality of life?
The last time the question was raised of what to do with dominant companies was during the progressive American era at the turn of the twentieth century. However the concerns were about the effective workings of open markets and the interference of monopolies, a situation that was addressed by the implementation of anti-trust laws. So far I’m not hearing anyone question whether there’s a need to regulate against large corporations – the mantra continues that bigger is better.
Anti-globalization proponents express fears that these large corporations hold undue influence over governments and the welfare of people around the world. Multinational corporations are hard to regulate when they move money and goods around the world in unprecedented levels. This is, they argue, a diminution of our sovereignty and democratic power. But while these are valid, if not overstated, concerns, they don’t speak to the economic risks of dealing with these companies in times of economic turbulence.
So how do we reconcile the essential need for growth to drive a free market economy versus managing the risks of failed mega-corporations? In the face of these questions options around limiting the size of corporations becomes an attractive option. Is there any reason growth can’t be attained when spread across more corporations within an industry? The most likely argument against this is one of efficiency. However I’m not sure large corporations win the efficiency contest – mergers and acquisitions are incredibly counter-productive in terms of productive capacity. They survive instead through economies of scale which affords them pricing advantages both in buying and selling products. I also have to think a few more factories, presidents, vice presidents, and all associated personnel per industry would not cause much drag on our economy.
This would also require a recalibration of our expectations of growth. If the president of a company maintains market share and turns a decent profit without growing either, maybe he or she shouldn’t be fired? Maybe then the need to merge, acquire and grow doesn’t become so imperative? Maybe private companies don’t feel as compelled to go public and turn their companies over to managers who don’t blink in selling the company to a larger competitor (and in Canada, often to a foreign one)?
Competitiveness and innovation would still exist and companies would fail if they couldn’t keep up, so the benefits of a free market economy would still prevail. It’s just that we would have to set our sights a little lower. Stop bemoaning the lack of Canadian multi-national corporations. The American Dream would change from a mansion to just a very large house with a nice lawn – or perhaps just three houses instead of seven. CEOs would have to live on incomes only one hundred times larger than their average employee rather than the 364 times more they made in 2007.
This isn’t about limiting growth, it’s about managing it. It’s about creating an economy where the failure of one or two companies doesn’t lead to the failure of twenty more; where the drive to win doesn’t lead to the packaging of unsustainable debt packages so money can be made on the same dollar many times over; where a country like Canada doesn’t have to locate all its people in a few urban centres in order to accommodate companies that are nothing but branches of companies owned in other countries; and where an entrepreneur can grow a business and be successful and then not be forced to sell it or expand rapidly in order to avoid being priced out of business. Managing growth is about ensuring it’s sustainable and stable. It will be interesting to see if this crisis grows to an extent where extraordinary changes in our system occur.
UPDATE: As I give this further thought - because I acknowledge I struggle with this whole idea of limitations on corporate growth - I realize one potentially fatal flaw is that it mimics the ignorance of human nature that brought down communism. A source of happiness and satisfaction for us is the pursuit of goals. Corporations, as the product of human endeavour, will undoubtedly be led by individuals whose very nature will propel them to get bigger and bigger simply out of the satisfaction derived from the achievement. Practical management of risk is ensuring controls are in place to prevent failure. I see the existence of these huge corporations as being detrimental to the efficient use of our resources and am searching for a balance between allowing business to succeed and excel while not risking our stability and security in then trying to sustain these massive companies in times of economic upheaval. This post is one suggestion as I work through possible solutions.