Government Safety Fail

It should come as no surprise that the federal government is using GM as an outlet for its rampant paternalistic urges.  The most recent example, coming from the Wall Street Journal, is particularly disturbing given the potential safety problems it will create.

Starting Jan. 4, General Motors Co. plans to do something unprecedented in the U.S. car industry: It will run its assembly line here around the clock on a permanent basis.

While common in other industries, not even car-efficiency benchmark Toyota Motor Corp. operates its plants routinely with more than two shifts. Car-assembly lines need too much scheduled maintenance and restocking for such intensive production to make sense, many industry experts say.

The Obama administration auto task force that oversaw GM’s reorganization last spring was startled to learn that the industry standard for plants to be considered at 100% capacity was two shifts working about 250 days a year. In recommending that the government invest about $50 billion in GM, the task force urged the company to strive toward operating at 120% capacity by traditional standards.

This situation is not without precedent. Government regulations frequently move behavior in the opposite direction of public health and safety. Increased regulations on average MPG for automakers results in lighter cars and, as a consequence, a higher number of fatalities. While government safety regulations for cars increase costs and incentivize consumers to keep older cars longer, resulting in greater emissions. At the very least, however, the preceding examples of government paternalism had some roots in good intentions. Running GM plants at 120% capacity has the potential to cause deaths for the sake of providing jobs and stimulating the economy. Unfortunately, such Keynesian policies do not provide jobs and do not stimulate economies. So the result of this latest act of paternalism will simply leave us with decreased safety and increased economic inefficiencies.

HT: Cafe Hayek

Stockholders vs. Stakeholders

Critics of capitalism (and therefore freedom in general) are ever quick to hold up cases of consumers and employees exploited by greedy corporations. These attacks often have negative consequences for the stockholders of corporations.  Stockholders of GM and Chrysler were sacrificed in order to serve the “greater good” (a term that, as I’ve stated before, is so idiotic it is depraved in its purported meaning).  David Friedman recently penned an excellent blog post on the ways in which stockholders are actually more vulnerable to corporate mismanagement than consumers or employees.

…my situation as customer and employee is very much better in this respect than my situation as a stockholder. It is true that, as a stockholder, I have the option of selling my shares of stock, which at first glance looks rather like my option as a consumer of not buying a product or as a worker of quitting a job. But the apparent similarity is an illusion.

If I choose not to spend twenty thousand dollars buying a car from Ford, Ford has one more unsold car and twenty thousand dollars less money. If I choose to sell twenty thousand dollars of Ford stock, on the other hand, the money I get is not coming at Ford’s expense. Another investor has paid me the money and now owns the stock, leaving Ford itself unaffected.

If the firm is being run in a way that fails to maximize stockholder value, he cannot escape that cost by selling his share, since the price he can sell it for will reflect the reduction in future profits and dividends, insofar as it can be estimated by other stockholders.

It follows that the stockholder is dependent, very much more than the other stakeholders, on other mechanisms for controlling a firm to make it act in his interest. That is a strong argument in favor of the current mechanism for corporate control and the current legal rules defining the fiduciary obligation of the directors.

Indeed, it is an argument for more than that. It is an argument for strengthening stockholder control in order to provide more protection to the most vulnerable party in the network of relationships that makes up a corporation. One way of doing so would be by removing current legal barriers that make takeover bids more difficult, and so protect managers and directors from the consequences of serving their own interests at the expense of the stockholders whose interests they are supposed to be serving.

I would like to add two points to this already outstanding argument. First: regardless of the practical effects on stockholders and stakeholders; the fact of the matter is that the corporation belongs to the stockholders. It is their property. As property is gained by money, as money is gained by production, as production is performed at the expense of an individual’s time, and as an individual’s time is an individual’s life, the right to property is inseparable from the right to life – which is an inalienable possession of every human being. So, practical considerations aside, the stockholders’ interests should still be protected over the interests of the stakeholders (note that “interests” are not synonymous with “rights” – the protection of the rights of one individual cannot necessitate the violation of the rights of another).

Second: the stakeholders rely on stockholders for their lives. Stockholders are not pirates scouring the market for plunder – they are the enablers of production. It is only by the productive energies and subsequent investments of stockholders that capital is raised to improve the quality of life for the masses (the beauty of capitalism is that society’s betterment is in no way a necessary motivation of the investors).

For all of the reasons discussed above, stockholders should be lauded for their contributions to society and not branded as blackguards of “corporate greed”.

Kenneth Feinberg: “Pay Czar”

The Wall Street Journal reports on Kenneth Feinberg, President Obama’s new “pay czar”:

In the annals of what used to be known as American capitalism, yesterday will go down as a sorry day: The Treasury and Federal Reserve announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks.

President Obama cheered the pay reductions as “an important step forward” and urged Congress to “continue moving forward on financial reform to help prevent the crisis we saw last fall from happening again.” The pay curbs are intended to feed the official political narrative that the bankers caused the entire crisis, and that cutting their future pay will prevent the next one. Only a politician could really believe this, or at least pretend to.

We certainly have no sympathy for bankers who’ve been bailed out, and the most defensible of yesterday’s pay curbs are those announced by Treasury “pay czar” Ken Feinberg. He was handed the task of determining compensation for 175 executives at seven companies that are still using money from the Troubled Asset Relief Program: Citigroup, AIG, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial. These companies—and executives—owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution.

Far more dangerous is yesterday’s announcement that the Fed plans to impose new pay guidelines on all of the banks it regulates. While the Fed imposed no pay cap, and it was at pains to say it didn’t want to impose a “one size fits all” standard, the implication is that any large single-year payouts will be frowned upon by regulators. The Fed wants what it refers to as more “balanced” pay standards, which in practice is likely to mean smaller bonuses up front and longer time frames to see if “risks” pay off over several years.

The irony is that judgments about what constitutes “excessive risk” at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in SIVs off its balance sheet. That certainly looks “excessive” now, though apparently it didn’t amid the credit mania. The point is that Fed officials aren’t likely to have a clue what kind of risks warrant tighter compensation rules. And these new guidelines may also drive the best and brightest out of the banks and into less regulated institutions.

Meanwhile, the Administration still hasn’t done anything to change the incentives for excessive risk-taking that are embedded in its own “too big to fail” doctrine. As long as bankers and their creditors believe they have a federal safety net, they will have a cheaper cost of capital that will encourage them to take greater risks. New pay rules will quickly be worked around or through.

The most profound mistake in these rules is the terrible precedent they set for wage controls across the economy. The Obama Administration will say that banks are a special case, and that is true. But once politicians feel free to regulate executive pay for one industry, it is no great leap to do it for everyone. Our guess is that these pay rules will prove to be both ineffectual and destructive—a perfect Washington combination.

Capitalism creates a greater amount of prosperity than any other economic system because individuals are incentivized to work in their own self-interest. A move towards regulating executive pay is an attack on the very foundation of our country’s economic success.  Furthermore, a simple supply and demand graph can show that any price ceiling – provided it is set below the market equilibrium – will cause a supply shortage. In the case of executives (who play a role so vital that most of us cannot comprehend its importance) this supply shortage could materialize in any number of ways. Talented executives could expatriate in greater numbers, retire earlier, or simply cease to invest as much energy in their jobs as they previously had. Again, these are merely some suggestions as to how a price ceiling on executive wages could stifle the supply of competent executives. The central point is that further regulation (of which price controls are a particularly vicious brand) will only dampen, if not destroy, any hope of an economic recovery.

The History of US Government Corporate Bailouts

(click to enlarge)

HT: The Big Picture