Friday, April 15, 2011

Mafia in Pinstripe: The Real GE Scandal

The transition from street thug to state mafia took a decade in Russia. I was an eyewitness to the Russian process: In 1992, I saw businesses being shaken down by bullies in jogging suits and shaved heads. Six years later, I talked with business owners harassed by crooked tax, sanitation, police, and fire inspectors. Under Putin, these petty thugs were replaced by officials in pinstripes, politely shaking down businesses in meetings in government offices and swank hotels. It has become civilized, but the outcome is still the same.

What does the Russian story have to do with GE?

GE is unique among American corporations. Since its founding, it has been consistently in Fortune’s Top 10 – the only long-term survivor of Schumpeter’s creative destruction. GE adapted better than others to changing tastes and technology under executives like Gerard Swope, Charles Wilson, and John Welch Jr., who wrote the book on the art of corporate management.

GE is still in the top ten under CEO Jeffrey Immelt, but it is a different GE. Instead of adapting to the marketplace, GE structures its businesses to harvest government subsidies, tax preferences, and bailout money. GE fits Schumpeter’s pessimistic forecast of bureaucratized, influence-peddling capitalism, which he had the temerity to call socialism.

A casual glance at GE’s annual report shows that most of GE’s businesses depend on favor with the government. Energy generating windmill turbines make money because of government subsidies and state orders. Nuclear power requires government licenses. Energy-saving turbines receive subsidies. GE’s lending arm may again need a quiet $140 billion bailout. Its huge medical services division must receive favorable treatment under a new health care law. Even its competitive jet engines could use a diplomatic boost when foreign airlines buy new aircraft. Its NBC division needs broadcast licenses and other forms of protection.

The GE scandal is not that it paid no U.S. taxes. It was simply following the social-engineering instructions of our tax code, which its tax department is able to nudge at times. The true scandal is that the once mighty GE has become a crony capitalist in its “partnership” with Washington. The hundred million or so in campaign contributions is chump change compared to the cost of its lobbying behemoth and its vaunted tax department.

The new winners in creative destruction at first naively think they have no need of government. Silicon Valley's Microsofts, Apples, Googles, and Facebooks create products no one had ever dreamed of. They can outstrip the competition on their own. They are then baptized by fire. Government agencies politely worry that they have grown too big; an anti-trust suit may be in the works. Revenue-hungry politicians may decide that taxing the internet is a good idea. Facing this reality, the creative-destructors open expensive offices on K-Street and join the crowd. An ounce of protection is worth a pound of cure, they reluctantly conclude.

There is an invisible cost to all this that few of us notice or understand. The mighty GE has been diverted from innovating and developing products that stand on their own to producing those things that its Washington partners want for the “good of society.”

1 comment:

  1. Continued from above...

    A Keynesian would argue that with demand for goods soaring, companies should increase production. Unfortunately, the projects creating such unsaleable goods have utilized the idled capacity of the economy. Labourers, material, and equipment can be had at a premium, not a discount. For most firms there may be little profit in expanding production and great profit in simply raising prices.

    Keynesians would argue that most government expenditure yields some value for the nation. Certainly true. However, within public finance
    there is meager cost and benefit analysis. There is some accounting of the financial costs of public endeavours, often vague and erroneous and usually bearing many an upward adjustment. Yet, an honest accounting of the financial benefits of public enterprise is
    notoriously absent.

    There are always costs in the things that we do and there are always benefits. In every decision, we labour at making benefits exceed
    costs. Had the public expenditure lowered costs or increased revenues for business or diminished prices for the consumer or enlarged his income, by an amount exceeding the funds invested and capital charges,
    then one may declare the expenditure a success. Until the authorities and economists develop a system and its tools, returns on public expenditures must always be scant or negative.

    What course would best benefit a nation in recession knowing the present delinquencies and ruinous nature of public expenditure?

    In economic crisis Government should avoid the use of any resources in equipment, material, and labour unless an evaluation of costs and benefits justifies the undertaking.

    Put money into the hands of those that know best how to right their financial ship and expend on worthy goods. Put money into the hands of those persons and firms that know well and can produce the items valued by the markets Lower the taxes on many activities and objects, and the nation will thrive. Lower or abolish the income tax and
    corporate tax, and marginal endeavours shall become profitable, and profitable endeavours far more so. Let the government maintain their
    present spending and erase taxes. William Gladstone spoke of the reproductive effect of tax cuts on government revenues. He could never quite believe how fast subsequent tax revenues erased and surpassed the created deficiency. That was 150 years ago.

    Offer financial aid to the idle: A loan for living and schooling expenses to enhance education or a loan to cover the unemployed until the recovery begins. The individual will then be able to decide the best course given his circumstances. If the recovery provides a worthwhile position, the worker will have little reason to ignore it. The student as well.

    The problem is a lack of worthy production, not a lack of aggregate demand. By limiting saleable and desired production with harmful make work projects, the nation is poorer with the result. By encouraging worthy production and limiting harmful public expenditure, the nation is wealthier with less competition for desired production.