Tag Archives: Bailouts

The New CEO Survival Guide

For better or worse, the United States is moving into an era where the government will be more involved in the economy and in the day-to-day decisions of American corporations. These entanglements will range from greater regulation of economic activity to temporary interventions like bailouts to substantial long term governmental holdings of equity.

Unfortunately, much of the debate on the question of how far the government should go has either been ideological or about the economic costs and benefits of particular interventions. Unsurprisingly, the ideological debate has pitted those who believe that government should never intervene in the private economy as a matter of principle against those who believe that government intervention is justified in any case where market allocations deviate from “socially” desirable outcomes. Somewhat more interesting are the economic debates about which forms of government intervention are most likely to achieve desired ends. A good example is the Krugman-Summers smack down over the Treasury’s toxic asset plan.

What I have long felt was missing from these debates is an assessment about the long term political ramifications of different types of government intervention. More specifically, I worry about how we can prevent certain forms of intervention from over-politicizing corporate decision making and turning the economy into one giant “pay to play” scheme.

Take the decision of the Obama administration’s decision to condition further aid to General Motors on the ouster of its CEO Rick Wagoner. Regardless of Wagoner’s merits or deficiencies in leading GM, the move sets a dangerous precedent in what it teaches other CEOs. Other CEOs presumably learned that their jobs may ultimately depend as much on their “political approval rating” as much as their economic contribution. CEOs will go to even greater lengths than they currently do to curry political favor and connections. More former politicians will be added to corporate boards and executive suites to provide insurance against ill political winds.

Of course, one might argue that such problems aren’t present in many European states where the government’s role in the economy is much more extensive. But there are many reasons to believe that those experiences will be hard to translate to the U.S. case. The first is history. There is ample evidence that corporate political activity has grown proportionately to the increased level of the government intervention in the economy. The second is our system of campaign finance that gives corporations foolproof opportunities to cultivate political connections. But the real problem may lie much deeper. Our entire political structure with its geographic basis of representation and relatively weak political parties makes it relatively easy for corporations and CEOs to build strong protective coalitions among legislators who are naturally inclined to represent narrow special interests.

So one has to worry that excessive intervention may turn our economy into a collection hyper-politicized entities like Fannie Mae and Freddie Mac. Of course, it would be another matter entirely if government-forced CEO ousters were to be a rare event going forward. But Tim Geithner told Katie Couric that the same fate may await other bailout CEOs.


In the aftermath of the 2006 election, the era of polarization was declared over in such astute analyses as this one:


The impetus behind such conclusions was the extraordinary success of “Red State” Democrats such as Jon Tester and Heath Shuler. But few pundits took note of the fact the these Red Democrats were only moderate or conservative on a few social issues, but quite populist on economics and trade. Even fewer considered the consequences of the extinction of “Blue State” Republicans for polarization in Congress.

But now that Congress has adjourned sine die, Keith Poole has fired up the NOMINATE machine, and we can look at what impact, in any, the 2006 elections had on the level of party polarization in the House and Senate.

This first figure is an update of the data presented in our book with Howard Rosenthal showing the average difference between Democrats and Republicans on the DW-NOMINATE conservatism scale.


Do you see the dramatic collapse of polarization in congressional term beginning in 2007? Me neither. In fact, polarization rose in the 110th Congress just as it has almost every term since 1975. The House had set a record for polarization in the 109th, but the 110th broke it. The Senate broke its own record set in 1867.

So what might the future bring? To get a prediction that is hopefully at least as accurate as Joe Klein’s, I have forecast the average conservatism of Democrats and Republicans for the next congressional term in the following way:

  1. Assigned all returning members their DW-NOMINATE score from the preceding term.
  2. Assigned all new members the average DW-NOMINATE score for their party and region. In other words, a new Democrat from the Midwest gets the average of all midwestern Democrats and a new Republican from the South is assigned the average of all southern Republicans.

Essentially, this procedure captures the effects of the regional distribution of partisan seat shifts. A seat shifted from Republicans to Democrats in the Northeast increases polarization whereas a Democratic pickup in the South decreases it. So here is what the House and Senate may look like next term.


senate_fc.jpgIn each of the figures, the red line is the average conservatism of Republicans, and the blue line is the average conservatism of the Democrats for each term since 1969. The triangles are my prediction for the next term. The Democratic average is expected to change very little, but the Republicans will be considerably more conservative. This, of course, is due to their continued hemorrhaging of seats outside the South. The net effect is again an increase in polarization.

All of this is predicated on the assumption that there will not be any major deviations from recent historical patterns. Of course, things could change. In the conclusion of our book (written in January 2005), Keith, Howard, and I speculate that a financial crisis triggered by a housing bubble might lead to a swing in the public’s partisanship and ideology that might cause the Republicans to moderate. So we have the crisis, a modest swing in public attitudes, but if the congressional votes on the bailouts are any indication, the Republicans haven’t take that last step.

The Politics of Bailouts

Tom Edsall quotes me and several other political scientists at the Huffington Post. My take away:

A carefully modulated analysis of likely trends by Princeton political scientist Nolan McCarty suggests modest gains for proponents of intervention.

“Whether intervention changes attitude toward government more broadly depends whether the public perceives that intervention primarily benefits ‘haves’ or the ‘have nots.’ Free markets and deregulation have long been justified by the notion that markets will provide discipline by punishing bad decisions. If it appears that government is stepping in only to protect those responsible for those mistakes, Americans could become even more cynical about government and trusts it less,” says McCarty. Conversely, “government intervention that tries to hold bad executives accountable has its own problems. It generates huge incentives for companies and executives to cultivate political favoritism to avoid punishment — pay-to-play writ large.” The net outcome, according to McCarty, is likely to be “somewhat more support for macroeconomic intervention and broad forms of regulation, but continued skepticism about government ownership and microeconomic planning.”

Not sure how “modulated” my analysis was, but I do come down squarely between Gary Jacobson and John Ferejohn.