Wednesday, March 28, 2012

The Case For Regulation - Part 2

Alan Greenspan was a Reagan appointee as Chairman of the Federal Reserve Board from 1987 to 2006.  He was the darling of many businesspeople and conservative politicians as a proponent of deregulation and a free-market system.  However, when called to testify before a House committee investigating the financial collapse of 2008, he said, “I made a mistake in assuming that the self-interest of an organization, specifically banks, is such that they were capable of protecting shareholders and equity in their firms.  The fact that they simply sought predatory gains for themselves [at the expense of customers] … was a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”  This semi-apology for the “flaw” in his perception of the motivation of financial leaders was presaged by his earlier statement in 2002 that, “It is not that humans have become any more greedy than in generations past.  It is that the avenues to express greed [have] grown so enormously.”

And so we have the flip side of the lure of business deregulation.  In a prior blog, the subject was the need for regulation to protect my physical wellbeing, and the wellbeing of the environment that surrounds me, from those who would cause harm.  The second need for regulation is a simple one: to keep people honest, thereby making our economy safe from crooks and business hypocrites.

We hear a lot about the wonders and benefits of capitalism and a free-market economy – benefits that I believe in strongly.  But we likewise hear many complaining about how government regulations are supposedly strangling those benefits and limiting our growth.  To which I again say, “horse hockeys.”

Our current reality is that we do a lot of rah-rah talk a lot about capitalism, but it is many businesspeople that have strangled American capitalism into near oblivion.  Capitalism only works when you have: a) easy entry into the marketplace to provide new competition and produce “better mousetraps”; b) open supply lines to meet unrestricted demand; c) truthful and transparent access to product information; and d) everyone playing by the same rules.  But those are not the conditions of the American economy today.  And contrary to the noise-making, the extent to which we do have these pillars of capitalism is only thanks to government regulations that provide them in spite of the negative efforts of many businesspeople.

The entry of new players into the market is not easy today given the dominance of the few mega-players in each industry.  Such mega-players dominate the percentage of market share available, and de facto dictate the products to be sold and their price.  New startups either get crushed by these heavyweights, or bought out and absorbed, or get pushed into smaller niche slices of the market.  We have two economies in America – the mass marketplace blanketing our everyday “generic” needs usually dominated by only 3-5 real players per industry; a specialty marketplace of small local vendors who nevertheless still have to compete with chain competitors (e.g. your local burger place versus McDonalds).  Yet even with their dominance, the big corporations still lobby for special treatment to drive out “the little guys.”  Greed to control markets knows no bounds.  It is only through the old Sherman Anti-Trust Act of 100+ years ago, and its regulatory descendants, that keep America from being totally monopolized like the early 1900’s.

Supply and demand are often no longer free-flowing.  Just look at the recent spike in gasoline prices in spite of lower domestic demand and increased drilling within America.  (America is now a net exporter of oil even as people scream for more drilling.)  But gasoline prices are driven by commodity traders (speculators) with no concern about resulting pump prices – and all half-dozen gas retailers move their prices together on the same day-by-day.  Why worry about Middle East oil sheiks when the real power players are at the minimally-regulated Chicago commodities market.  Same story for critical medicines that are being hoarded to jack up prices.  Or unmet demand for better gas mileage in cars and for alternate energies that improve only due to government pressure.  Left on their own, too many businesspeople would corner the market and sit on their protected laurels.  Anti-monopolistic regulations seek to keep the capitalistic market open.

Capitalism’s self-regulatory mechanism – consumer choice – only works if consumers know what products actually are.  Consumers need full disclosure to make informed buying decisions, thereby eliminating bad businesses through their spending choices.  But the track record of such disclosures in business is very poor.  Filler materials in food; chemical additives in agriculture and manufacturing; product defects leading to recalls; hidden fees in bank charges and loan agreements; pyramid investment or retailing schemes; non-published medical fees.  All of these and others exemplify the willingness of too many businesspeople to deceive the American people as to what they are actually buying.  Where we are prevented from making a genuine choice due to deception, regulation has been needed to keep many self-proclaimed capitalists honest.  All of those labels we read on the goods we buy came from government mandates, not voluntarily from businesspeople’s consciences.

Which brings us to playing by the rules.  Capitalism needs some level of free-wheeling and free-thinking individualism.  It sparks the creativity and inventiveness that have made our economy great.  But it also demands honesty and everyone playing under the same rulebook.  Favoritism must be crushed.  Big corporations spend millions on lobbyists and politicians to get special legal, tax, regulatory or non-competitive bids to the exclusion of their competition and to the detriment of the consumer.  “Business success” should not be measured by wins in the legislatures, but by wins in an open marketplace ruled by quality and meeting demand.  Yet competitors and small businesspeople are being frozen out of the game by rules set by others.  When the marketplace is disempowered from its ability to self-regulate due to rigged rules, then it is only by regulation that some pushback towards fairness can be achieved.

On the mantle over my kitchen fireplace sits a set of five small, antique pewter containers of varying size.  They represent standard measures for serving alcohol, required in Irish bars @150 years ago, all because bartenders had proven themselves untrustworthy to fill customer drinks to proper mixtures.  It was that same kind of shortchanging that gave us the “baker’s dozen” of 13 items to ensure honest selling to consumers.  I am all for capitalism, and always have been.  But our economic history is sadly filled with many dishonest capitalists.  It has been only regulation, enforcement and exposure that have keep such dishonesty somewhat at bay.

Regulation needs to be trim, focused, and appropriate without being overly-detailed and constricting.  But when businesspeople complain about regulation, my answer is simple: then behave honestly and virtuously.  Regulation arises from a failure to act properly and responsibly in the first place.  Until proven otherwise, regulation and oversight is needed.

Monday, March 12, 2012

The Case For Regulation - Part 1

James Madison once said, “What is government itself but the greatest of all reflection on human nature?  If men were angels, no government would be necessary.  If angels were to govern men, neither external nor internal controls on government would be necessary.”

In our country today, we are blessed with many ethical and dedicated people in business and industry.  People who seek to do the right thing, treat their employees fairly, create good products and stand by them, and deal honestly with their customers.  We do not often hear about what they do, as they are usually overshadowed in the news headlines by the self-serving crooks and frauds who corrupt their professions.  But it is these ethical ones that we should respect, acknowledge and reward with our business whenever we have the choice of our suppliers.

For the all-too-many others, those who are not angels, we should rightly express our contempt and seek to put them out of business and/or hold them accountable as appropriate.  Unfortunately, in our complex, multi-layered business structures of today, it is near impossible for an individual American to identify such miscreants, let alone take effective action to protect or remedy such malfeasance.  Business has gotten too large and commanding, with too many layers in their hierarchies, and with too many links in their supply and distribution chain, to peel them apart and see what is truly happening inside them.  Hence government is the only real counterweight of sufficient size to defend against those businesspeople who act irresponsibly.

Many businesspeople complain loudly today about “government intrusion,” with regulation being a primary object of their complaint.  They claim that if we would just get rid of “unnecessary and unneeded” government regulations, supposedly our economy would be booming again, jobs would be plentiful, and all would be well across the land.  To which I emphatically reply, “horse hockey.”  Yes, there are a very few I would be willing to trust to act on their own for my well-being.  But the overall track record speaks a different story, and thus far I choose to err on the side of prevention rather than cure.

Many rail against the Environmental Protection Agency.  But I have seen the raw sewage emptying into our waterways, the beaches closed due to disease-infested water.  I have seen the residue of greasy film and grime on my window sills from the smog in the air.  I have seen pristine lands and forests disappear under the bulldozers’ wake and developers’ callous disregard, and the scars of strip mines dug in the name of “progress.”  I have seen the smoke from automobile engines and power plant smokestacks.  I have seen the trash littering the highways, and the toxic chemicals poured into the ground without regard for the runoff into people’s property and their crops.  And so I say “NO thank you” to the people who have perpetrated these actions, and “YES, thank you” to the government agencies who have worked to stop these abuses.

I have seen the faces of coal miners caked in black as they emerge from their deep pits, gasping for oxygen due to black lung disease.  I have seen factory workers with mis-shapened bodies from standing on the assembly or food production lines doing physically repetitive tasks without relief or concern from the front office.  I have seen migrant farm workers living in squalor, and the working poor who still cannot earn enough of a wage to provide a decent standard of living for their families.  And I say “thank you” to those government agencies who have made our workplace and labor practices safer.

I have seen fields of cows crushed against each other, standing in mud and waste slop at troughs of corn intended to fatten them up – more fat and weight for higher, faster profits.  Or similar rows of chickens in narrow cages for higher yields per square foot.  We hear food alerts of chemical or bacterial infections on our “fresh” produce, and see grocery shelves cleared out but not before deaths are recorded.  We read about the concrete powders inserted into baby formula and the carcinogens blended into construction drywall so that Chinese manufacturers can increase profit margins.  We find out after-the-fact that something called “pink slime” is automatically added to our hamburger meat; seafood is now “grown” in small, filthy tanks instead of caught from the ocean; milk and grains have been genetically modified so that what we think we are buying is not what we are actually getting.  So I say “thank you” to the Food and Drug Administration and others for stopping such activities when they can.  Or at least for forcing producers to label their products with the truth of where they came from and are actually made of – a truth that the businessperson did not care to honestly and voluntarily tell me.

The list can go on and on with many other government agencies and the oversight that they do.  Can regulation be too exhaustive and overdone?  Absolutely yes.  Especially when regulations go too deep, or are not properly proportionally “scaled” among small, medium, very large, and multi-national  companies.  One-size fits all does not fit all.  Regulations need to be well-balanced, and oftentimes they are not.  But as much as I personally despise rules and regulations on me set by outsiders – I am too freakin’ a radical independent at heart – right now I do not trust the alternative of deregulation very much, or companies operating on the honor system.  How do we think we got into our current mess?

I have heard several CEOs of multi-national corporations complain that they can do business faster and easier in China than the U.S., implying that our government is unwarrantingly limiting their economic potential.  I actually have no doubt that they can do business easier in China.  A company that is used to telling people what to do should be comfortable working with a dictatorial government that treats its people the same way and simply tells them where a plant will be put without meddlesome public discussion.  China has a peasant labor force willing to leave their homes and families for months at a time, live barracks-style in factory dormitories, work for $1/hour in 12-hour shifts – including younger children – all with no ability to complain.  But China will also steal companies’ copyrights and insist on getting their trade and manufacturing secrets, and if you do not acquiesce then they will freeze you out.  And in those instances, to whom do these businesspeople turn to for help?  Their supposedly interfering federal government.

No, the price of doing business as China does is way too high.  We lived in such primitive economic times 100+ years ago, and decided that profit alone is not enough.  Socially responsible and legal profit also matter.  Until men prove that they are in fact responsible angels, I will opt for constraint on them.  And so for “promoting the general welfare” and providing for our “common defense” against corporate abuse when it occurs, once again I say “Thank You” to those government regulations and regulators who help to keep the needed balance we very much need to have.

As Martin Luther King, Jr. observed, “It may be true that the law cannot change the heart.  But it can restrain the heartless.”