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.