Along with the issues of executives who ran their companies into the ground keeping their jobs and managing hundreds of billions of dollars of taxpayer relief money, and of stock holders who invested in those companies capturing the billions of dollars in breaks through rescued stock value, there is another issue with the corporate bailout that I ant to consider.
It is the thesis that it is foolish of us to allow a company to get so big that it cannot fail.
One of the ways that we can interpret these current events – such as the fact that AID has decided to award bonuses in spite of the fact that the people getting the bonus destroyed the company, is that they get to hold the United States itself hostage.
It holds a dagger to the throat of the American economy and says, “One false move and the economy gets it.”
Just before the government produced its most recent bailout package, AIG sent a report showing how much economic destruction will be done if the company is allowed to go under. So, the company collects another few billion dollars of taxpayer money, which is then used to keep those who did so much harm to the country in their current positions following business as usual.
A payment, in economic terms, is a vote that whatever one is paying for is something that one wants to encourage and promote – to make it more common than it would have otherwise been. Nearly $200 billion in bailout money to AIG says that this is something we wish to encourage and promote. It is a market signal that says, “If you can make your company so large that you can hold the United States hostage, you do not have to worry about bankruptcy and failure.”
Of course, not worrying about bankruptcy and failure means that those business leaders in that position can afford to grow reckless, increasing the chance that future bailouts will be needed. They do not have much of a reason to avoid those bail outs.
So, one of the things we should be asking ourselves as companies grow and wealth (and economic power) gets consolidated into a few hands is, “What would the cost to the country be if that company is mismanaged into bankruptcy?”
It should never be the case that a company grow so large and so important that its bankruptcy cannot be allowed.
This will, as a matter of fact, result in certain inefficiencies. There will be a loss of certain economies of scale. However, we have to compare those costs with the costs of the current financial crisis. We are not only talking about the cost in terms of government expenditure, but costs in terms of millions of people out of work, factories closed, personal savings and home values lost, college educations and other investments foregone.
Considering these costs, the loss of some economic efficiency from requiring companies to remain small enough that none of them would be missed if they failed, the former seems to be the lesser evil. Besides, the latter brings its own economic inefficiency – the inefficiency of businesses whose leaders care less and less about the possibility of failure.