Monday, May 18, 2009

Readings at the intersection of politics and business 

Starting with the Bush administration's interventions to stop the financial crisis in September and accelerating after the election and inauguration of Barack Obama, it has become almost impossible to write about business or the economy without taking politics into account. So it is today, when I read four stories in a row at the intersection of politics and business. Herewith, linkage and some notes.

From the WaPo: At Geithner's Treasury, Key Decisions on Hold.

Seven weeks after the Treasury Department announced that it was ousting General Motors chief G. Richard Wagoner Jr. in the federal bailout of the company, he is still technically on GM's payroll.

Wagoner's removal has been held up because senior Treasury officials have yet to decide whether he should get the $20 million severance package that the company had promised him.

The delay is one of many hitches that have slowed a host of important policy actions in the four months since Timothy F. Geithner became Treasury secretary. While Geithner has taken dramatic steps to address flashpoints in the economy, the work of carrying out those policies has bogged down because critical decisions about how to do so aren't being made, interviews with a broad range of federal officials show.

This is the problem when every business decision is a potential political disaster or opportunity: Just when we need business at Internet speed, we get it at Pony Express speed. Speed of decision is essential to any business and undoubtedly a non-negotiable requirement for the subsidized American automobile manufacturers, yet government is incapable of it. Expect more paralysis from businesses that are the object of government intervention.

The president is joking about auditing people who annoy him. Bad idea:
At his Arizona State University commencement speech last Wednesday, Mr. Obama noted that ASU had refused to grant him an honorary degree, citing his lack of experience, and the controversy this had caused. He then demonstrated ASU's point by remarking, "I really thought this was much ado about nothing, but I do think we all learned an important lesson. I learned never again to pick another team over the Sun Devils in my NCAA brackets. . . . President [Michael] Crowe and the Board of Regents will soon learn all about being audited by the IRS."

Just a joke about the power of the presidency. Made by Jay Leno it might have been funny. But as told by Mr. Obama, the actual president of the United States, it's hard to see the humor. Surely he's aware that other presidents, most notably Richard Nixon, have abused the power of the Internal Revenue Service to harass their political opponents. But that abuse generated a powerful backlash and with good reason. Should the IRS come to be seen as just a bunch of enforcers for whoever is in political power, the result would be an enormous loss of legitimacy for the tax system.

Our income-tax system is based on voluntary compliance and honest reporting by citizens. It couldn't possibly function if most people decided to cheat. Sure, the system is backed up by the dreaded IRS audit. But the threat is, while not exactly hollow, limited: The IRS can't audit more than a tiny fraction of taxpayers. If Americans started acting like Italians, who famously see tax evasion as a national pastime, the system would collapse.

One reason why Americans don't act like Italians is that they see the income-tax system as basically fair in execution. A tax audit or a tax-fraud prosecution is still seen, usually, as evidence that someone has done something wrong. If it comes instead to be seen as "just politics" then the moral component of the system will be gone. For the system to work, people have to believe that it is fundamentally fair.

And, of course, this seems especially problematic from a president who, by dint of his nominations, does not seem to think that tax evasion reflects poorly on a person's character.

From the Hill: Antitrust eyes turn toward Google.
Google, the Internet goliath, is on a collision course with President Obama even though its employees and executives have lavished money and support on America’s new chief executive.

The administration’s signal this week that it will take a more aggressive stance toward monopolies has huge implications for Google, according to several antitrust lawyers.

The decision gives a green light to companies that want to bring antitrust complaints to the Department of Justice, said antitrust attorney Joe Angland, of White and Case.

Ed Kutler of Clark and Weinstock said there’s no question Google, which has steadily increased its Washington presence this decade, will need to consider politics more in making decisions....

The background of Christine Varney, the top antitrust enforcer at the Department of Justice, suggests Google will be a target, several lawyers said. Varney represented Netscape, the small computer-services company at the center of the Clinton administration’s antitrust case against Microsoft. She has described Google as having acquired “a monopoly in Internet online advertising,” though she has also said it did so legally. (bold emphasis added)

Ah, yes, let us by all means bind up a third incredibly successful American technology firm in antitrust litigation. The first two such cases -- IBM and Microsoft -- just weakened great companies to no benefit for consumers. Both are less influential today, not because of endless harassment from the Antitrust Division but because competitors -- Microsoft and Google, respectively -- came along and changed the game entirely. So it will be with Google, which faces a massive threat from social networking (Facebook will one day be able to sell rifle-shot ads that are specifically tailored to, well, you, and if not them then somebody else). We should all hope, in this case at least, that Obama can be bought.

Finally, New York Times business columnist Gretchen Morgenson sings the praises of "say-on-pay," the corporate governance proposal that would allow stockholders to vote directly on executive compensation. Her theory is that this will cause public company executives to spend more time talking with their stockholders. Huh? Most CEOs and CFOs I know spend a huge amount of time -- possibly 20% of all their time -- talking with stockholders. Who are these "imperial chief executives who shun contact with the great unwashed"? Are they anything but a fantasy in the minds of journalists burdened with a severe case of "status-income disequilibrium"?

So what is the objection, you might ask, to "say-on-pay"? It is that most stockholders, who can and do dump their stock on a whim, bear risk over a completely different period of time than the CEO and other executives. Few voting stockholders -- virtually all of whom are institutional portfolio managers rather than mythical individual investors -- actually have a long-term interest in the company, so they will cast their vote on matters such as executive compensation with an eye toward the next quarter or year, not the company's ability to attract and retain good management over the long term. Or, worse, they will vote a particular way to achieve a political purpose or so they can brag about it at all the right cocktail parties.

There is, of course, a way to motivate stockholders to think about executive compensation realistically, instead of politically: Require that any stockholder who casts his vote on executive compensation hold the shares for the duration of the executive's contract or the vesting period of the compensation that is subject to the vote. That would be fair, and insure that the voting stockholder actually had the best interests of long-term investors in mind.


By Anonymous Anonymous, at Mon May 18, 03:38:00 PM:

Apropos of promoting a free and independent press, TH, remember to vote with your wallet: Do not buy the NYT!

The problem Google faces is what to do with all the cash. If their business model is to be extended, they'll run afoul of the antitrust people, who are obviously itching to pull an IBM on them, and yet if they cannot extend their activities then they just turn into the ultimate in cash cows. There's not much fun in a future like that. Hire David Boies right now I guess, and commence firing.  

By Blogger Gary Rosen, at Tue May 19, 01:39:00 AM:

BO's remark about audits is of a piece with his tasteless remark about the Special Olympics. For all his vaunted "charm" and "intelligence", he has no respect for the dignity of the office he holds.  

By Anonymous Anonymous, at Tue May 19, 10:40:00 AM:

Regarding "say-on-pay", I propose that ALL pay raises (including cost-of-living, per diem, etc.) for our elected officials be put to a vote of the electorate and contingent on the voters' approval. Furthermore, I propose that the voters have the right to vote to DECREASE the pay of the elected officials.

Hangtown Bob  

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