December, 2011

Fruits of Thought

Big Decisions In The Year Ahead

Decision-making is at the core of leadership. How do decisions get made and what types of conditions and what kinds of leadership lead to optimal decision-making?

On a governmental level, in both the United States and Europe, the situation is portentous not so much because poor decisions are being made, but because the political dynamic seems to preclude the possibility of making the correct decisions.

Take Europe, for example. For all the talk about “bailing out” the various countries, it is worth noting that none of the plans recently enacted or proposed involved doing anything for the people of the countries. The bailouts were for holders of debt.

It is pretty clear that those who irresponsibly purchased these securities are the ones who should suffer the consequences of their own incorrect judgment or imprudent action. This is true ethically; it is outrageous to raise taxes on some poor German laborer so that some holders of Italian debt can be bailed out. It is also true economically. It has been said that capitalism without bankruptcy is like Christianity without hell; the concept just doesn’t work.

This is not just an issue between governments. Ireland, for some odd reason, thought it desirable to guarantee the debts of all the banks in the country, thus burdening innocent taxpayers with debts they didn’t undertake and bailing out the creditors of these banks.

In the United States, much of government policy for the past half-decade has been aimed at bolstering the housing market. There is certainly a big political constituency for this — namely home-owners. Yet there are plenty of people who would like to buy homes and can’t. It is inappropriate for the government to intervene in favor of the interests of sellers over the interest of buyers.

The too-big-to-fail doctrine is repeated ad infinitum with little evidence that such a thing is true. Had Bear Stearns gone bankrupt, there is little evidence that any catastrophic thing would have happened, and there is a lot of evidence that bailing the firm out undermined popular support for laissez-faire economic principles — and for good reason. All of a sudden, people realized that the system was now a “heads-I-win, tails-you-lose” proposition. If Bear Stearns makes billions, its investors keep the profits, but if it goes bust, the taxpayers take the hit.

The Occupy Wall Street crowd laments that “Wall Street” was bailed out by the taxpayers and then says that since bankers were bailed out, so should everyone else — everyone else meaning everyone with a student loan, anyone behind on their mortgage, etc. OWS is right that it was outrageous to provide taxpayer money so that Wall Street could be bailed out. The mistake is in blaming the bankers. It is human nature that people will try to take advantage of whatever opportunities exist to make a buck — if that includes becoming beneficiaries of public largess, that avenue will be enthusiastically pursued.

There is no possibility of bailing out everyone all the time. As Margaret Thatcher said, “The problem with socialism is that, sooner or later, you run out of other people’s money.” The reasonable policy prescription is to constrict the freedom of action of government so politicians can’t use the public purse to win friends and influence people.

The Founding Fathers thought that abuse of government could be limited by the scale of the Republic. In The Federalist No. 10, James Madison wrote that “factions” would keep the government in check. In other words, different special interests would hold each other in check. It worked for a long time.

What the Founding Fathers did not count on was that governments would, one day, purport to do everything. So when the great program crops pushed the last Farm Bill, the produce industry did not form alliances with a goal of defeating the Farm Bill. Instead, the industry demanded a sliver of its own as its price for going along with the bill. Multiply that dynamic by thousands of industries and interest groups and thousands of bills and you see quickly how we can fall into such trouble.

How can we get out? Much of the industry efforts place the emphasis on leadership and, indeed, if you listen to the Republican critique of President Obama or of President Obama’s critique of Congress, you get pretty much the same idea: That if only our leaders were good enough, these problems could be transcended.

Perhaps. It is not obvious that we have many leaders with learning, temperament and character similar to Washington, Adams, Madison, Jefferson, Hamilton, etc. Perhaps such people could solve our problems. If these people did exist though, is there any great likelihood that our culture and political process would bring these leaders to positions of prominence and influence?

The year ahead will be filled with big decisions. The fate of Europe hangs in balance and the United States faces a Presidential election as well as the election of the whole House and a third of the Senate. Every year is crucial for many businesses. Let us hope the leaders are up to the task... and the followers as well.                 pb