5 myths about big business vs. big government

Image courtesy of Flickr user Fly Navy

(MoneyWatch) COMMENTARY A new book by David Rothkopf titled "Power, Inc.: The Epic Rivalry between Big Business and Government, and the Reckoning that Lies Ahead" explores the power struggle between global corporations and government attempts to regulate them. 

Rothkopf asks a number of intriguing questions like which is more powerful, which has more political clout and which has a greater impact on world events. He concludes that global corporations are in charge these days and that the world needs more of a balance.

On the surface, that sounds sort of reasonable. While I agree that balance is a good thing, I don't agree with the author's ideas on how to achieve it. Moreover, I don't agree that global corporations are running the show, so to speak.

In a CBS interview, Rothkopf talks about how U.S. banks brought about the financial meltdown by essentially pulling the government's strings. First they told the government to get out of their hair, then, when everything fell apart, they said bail us out. And now, aside from Dodd-Frank, things are pretty much back to the way they were.

Rothkopf essentially thinks that global corporations have become too big, that they wield too much power and that stronger global regulation will solve the problem. He says we need more in the way of real global regulatory mechanisms, organizations like the IMF, World Bank and the United Nations, except with more teeth.

I think that argument is so over-the-top wrong it makes my head spin. So, if for no better reason than to keep me sane, let me try to bring this discussion back to planet Earth and boil my objections down to five myths about the alleged power struggle between global corporations and government regulation.

First of all, the idea that the banks caused the sub-prime mortgage crisis and the subsequent financial meltdown is ludicrous. Sure, they were complicit, but so were the heads of pseudo-government agencies Fannie Mae and Freddie Mac, federal regulators, the Fed and several congressional leaders, as I explained in Who's responsible for the financial crisis?

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The second myth is that government regulation is the cure for bad capitalism, crony capitalism, fraud and greed. The problem with that argument is that government leaders and regulators are subject to the same issues as corporate executives. That's because they're people, and the more power you give them, the more greed and fraud you'll get.

It bears mentioning that, when Lord Acton famously wrote, "Power tends to corrupt, and absolute power corrupts absolutely," he was referring to political and religious leaders -- kings and popes -- not business leaders. That said, they're all flesh and blood humans, so they're all the same in that respect.

The way to guard against corruption and fraud is to have a logical system of checks and balances. That, I agree with. But that balance doesn't necessarily mean more government regulation. That just concentrates more power in one place and, in turn, creates more opportunity and incentive for corruption, manipulation and cronyism.

For example, if you had a simple tax code of x percent, for simplicity sake, there would be no lobbying about tax codes and no loopholes for big companies or the wealthy. The same is true of any laws and regulations. When government overreaches and over-regulates, that's when you end up with corruption.

Which brings us to the third myth, that more regulation is the enemy of big business. Actually, the opposite is true. The more regulation, the more opportunity for corruption, the bigger the advantage for bigger companies to lobby and manipulate the system, the harder it is for small businesses to survive. There are loads of examples.

In most American cities, you can't own a taxi unless you're a big company with $1 million to pay for the huge medallion "tax" set by regulators. Dodd-Frank is likewise having a similar affect on regional banks, just as Sarbanes-Oxley made it more expensive for small companies to become publicly traded. All those regulations favor big business.

The fourth myth is the premise that, over time, corporations have become bigger and more powerful. Yes, Apple (AAPL) recently became the sixth company in history to reach a $500 billion valuation, but there's a reason why the other five have since fallen below that mark.

There are a number of limiting factors for corporate growth. Bigger is only better to a point. And so far, there always seems to be a point. The reason is twofold: competition and things change. Those are the two dominant balancing factors for businesses.

In every case, at some point, growth in a mature business is not as profitable as it once was. In the interest of long-term shareholder value, it's better to refresh product lines, adopt new technology, start new lines of business and abandon old ones.

Somebody should really do an inflation-adjusted analysis of the biggest companies of all time. Somehow, I doubt that we have substantially more or bigger big companies and fewer small companies today than we did 50 years ago.

The final myth is that, at a macro level, there's some sort of global power struggle between big business and government. Look, we live in a global economy. Nations can't prosper without business prosperity, and big companies can't prosper without laws that enable prosperity.

That's sort of the interesting thing about the marriage of democracy and capitalism. They're inherently balanced, as long as neither side over-reaches. Some regulation is good. Some government is good. After all, we're a nation of laws, right? And we have three branches of government to maintain that balance.

In any case, it's up to we the people to possess the leadership and the collective wisdom to find the right balance and, when it gets out of whack, as it does from time to time, to bring it back. Hopefully, we learn from our mistakes and do better next time.

But there is no Utopian, big brother, regulatory body or bodies, on any scale, that can make everything right. Because, and here's the key point: the bigger and more powerful the regulatory body, the more corruptible it is. And that corruption is most effectively exploited by, you guessed it, big business. Ironic, isn't it?

Image courtesy of Flickr user Fly Navy.

[theonewithfeet]

Pretty woolly reasoning here:

1. Banks aren't responsible because others were involved... ok... so banks weren't SOLELY responsible however I suggest that they were the ones pushing the toxic products and actually committing FRAUD. They were also the ones who had to be bailed out.

2. Regulation won't help because politicians and everyone else are corruptable. Well guess what repealing regulations got us in the mess. I'd class the repeal of regulations (Reagan, Bush1, Clinton, Bush2) as corruption (or stupidity). Banking used to be BORING, profitable but BORING. That was back in the 70's before the regulations put in place after the great depression started to be repealed by Reaganites and Thatcherites the world over.

3. So more regulation is actually a friend to big bad business - huh? Can't have it both ways... To be fair this is a busted myth but for the wrong reasons. Certainly the Sarbanes-Oxley type regulations (or Bureaucratic onslaughts) do favour big business as stated however these are designed to be so. Dodd-Frank is in that mould (only a corporations lawyer could love it). Understandable regulation such as the leverage limit Bush2 raised and the Glass-Seagall separation of investment and retail banking are/were highly effective at keeping the sharks from harming anyone but themselves.

4. Well gosh - in the UK they are seriously talking about giving corporations a vote!! The bailouts stand out as power - why not let let-her-rip capitalism work? The remedy for a bubble is a crash, a recession and share holders losing their shirts - why not let it work instead of socialising the losses and excesses with a bail out? Oh sorry everyone's elderly mum would be turned into a beggar eating out of garbage cans - well best get on with paying up.

5. Think you may be correct on this one - except China is not a democracy and currently it's scheduled to eat the west's lunch about 2018 (GDP greater than the USA). My own view is there is to much connectivity and too few barriers. Asian countries stepped back from connectivity after being collectively raped in the late 90's (remember the Tiger Economys?. There are certainly places where business is way too powerful (eg the USA where Goldmanns runs everything) but elsewhere there is actually hope.

[jp3smiles]

Mr. Tobak makes some excellent points, but perhaps some additional remarks would be helpful.

The point that I believe could improve with elaboration is: "The way to guard against corruption and fraud is to have a logical system of checks and balances. That, I agree with. But that balance doesn't necessarily mean more government regulation."

More government regulation cannot be the answer. Effective government regulation that is streamlined, elegant and diligently enforced is needed to attain the balance sought. The regulators need to be incentivized to perform their jobs diligently and with a mindset to adapt enforcement using reasonable discretion. Unfortunately, many regulators and other government officials are merely employed in a transitory manner on their way to much more lucrative positions supporting big corporate interests.

Perhaps viewing the corporation - government relationship as symbiotic rather than adversarial would enable the parties to more readily develop mutually advantageous solutions. Based on such a view, corporations who compete fairly with each other and generally refrain from deceptive/fraudulent practices will have an interest aligned with the government to prevent corporations who generally engage in deceptive practices and unfair competition from being advantaged by their unethical behavior.

[jeannutson]

Restricted and dwindling financial reources especially under these harsh economic conditions is a factor that reduces the impacts or the influence of governments in global affairs and is likely to reduce it further as the global economy continue to worsen.

[stobak2]

Folks,

The article was a rebuke on government regulation. It was about exposing myths about regulation and the corruption of big government. It was a big picture article. It was not about providing a solution to what's going on in America today.

I happen to think America on its present course is on its way to disaster and I've written about that extensively. And yes, it is up to "we the people" to vote people into office to lead us out of this mess. That is, in fact, the only option open to us. That's how it works.

One more thing. It's not a very good idea to throw the baby out with the bathwater when we're in trouble. What made America great is the constitution and its guiding structure, the unique combination of democracy and capitalism and the balance inherent in each system. For democracy, it's the three branches of government. For capitalism, it's competition. The fix for where we are today lies within that construct, not outside of it, i.e. more, bigger government regulation.

ST

[fredricwilliams]

This is a great article for exposing misguided thinking about the problem.

However, when it comes to presenting a solution, it seems to have been written by Pollyanna.

The author writes: "That's sort of the interesting thing about the marriage of democracy and capitalism. They're inherently balanced, as long as neither side over-reaches. Some regulation is good. Some government is good. After all, we're a nation of laws, right? And we have three branches of government to maintain that balance."

I'd say there is nothing "balanced" about any government and capitalism. To take an extreme, the USSR had elections and could describe itself as a democracy -- indeed, Karl Marx said that democracy with universal suffrage was the key to communism. Government is force, and force rules freedom. So Government runs things in modern economies, although corporations may try to use money and pressure to protect their interests, just as individuals do when dealing with the mob.

And we don't have "some" government. The current spending by government at all levels in the US is well over $50,000 per year for each household -- with most of that at the distant and corrupt federal level.

The author says: "In any case, it's up to we the people to possess the leadership and the collective wisdom to find the right balance and, when it gets out of whack, as it does from time to time, to bring it back. Hopefully, we learn from our mistakes and do better next time."

I wonder what the author is smoking. We don't possess leadership -- we have a collection of disreputable people forced on us as leaders. Richard Nixon, the crook; Reagan, the actor; Bush, the incompetent son of a politician; Clinton, the lying philanderer; Bush, the grandson and incompetent son of an incompetent politician; Obama, the smooth talking ne'er-do-well; and now we are offered Romney, the rich son of a rich politician.

As for "collective wisdom" that is an oxymoron. The collective is mediocre. It is not well-informed, it is of average intelligence. Wisdom is rare, not common. In a group, it is overruled by ignorance.

There is no balance -- and things have been "out of whack" for a very, very long time. Remember Vietnam? How about our massacres in the Philippines a century ago? What about slavery?

Geez, guy, you are smart enough to see through the solutions of others -- but don't brush us off with nonsense about how everything is rosy. Keep the problems in clear view -- and hope for a Messiah.

[pgb]

I could not have responded better myself!

But the original author deserves congratulations for not buying into the ridiculous myth that we can trust government and cannot trust corporations. The reality is that when it comes to corporations, consumers have all the power. But when it comes to government, politicians have all the power. (Someone might foolishly argue that voters have power over politicians, but as you rightly point out, the major party's choices are really no choices at all.)