Monday, June 1, 2009

General Failure

Devil: Did you know, beginning in the late 19th century, corporations were granted all the rights of the individual, but none of the annoying responsibilities. They lack, almost by design, any kind of moral compass, conscience, or compassion. Basically, corporations are a way to enact sociopathic behavior on a grand scale. In short, they're what makes this country so damn great. [From the recently cancelled series Reaper]

I am not a specialist in international political economy or the auto industry, so I guess I can only react with schadenfreude to GM's bankruptcy. Others are blogging about a dying industry, but my reaction is twofold (given that non-American car companies seem to be doing ok, including those with significant production in the US): a bit of sympathy since part of the crisis is due to stuff out of the control of the auto industry--the collapse of the financial sector and the credit crunch; and a grim acceptance that long term interests tend to get swamped by short-term incentives.

In the short term, it made complete sense to focus on gas-guzzling vehicles, epitomized by the Hummer brand (perhaps most appropriate name in the history of manufacturing as its future .... you can guess the rest), as these kinds of vehicles had more profit per unit than the more efficient models. Obviously, at some point, fuel prices were going to rise and Americans would finally turn away, albeit belatedly and slowly. Was there planning for this? No, of course not, as the folks running the corporations were focused on the short term profits and short term stock prices, for which they were over-rewarded.

This is a classic problem in politics as well as economics--how to build in incentives for leadership focused on the longer-term? I think it is probably easier in the corporate world, as one could devise reward systems that have payoffs down the road--post-dated bonuses, for instance. Many stockholders are exactly that--long term holders of stock--they should have incentives and power to force corporate types to focus on the medium and long terms.

In politics, this is much harder--elections cannot be that far away if we want any kind of accountability. Indeed, France used to have a seven year presidential term, which gave significant autonomy of the tyranny of the short term, but recently changed their constitution. Again, increased autonomy can still lead to bad outcomes--witness the role of the Fed in the derivatives shenanigans.

One of the key themes of For Kin or Country is exactly this problem--does a politician pursue what is best for their key constituency (kin in the case of irredentism) or what is best for the country? We end up finnessing it by focusing on other interests and identities that offset the power of the kin rather than clearly showing how and when politicians can look to the long term. It is not that Iliescu of Romania or Orban of Hungary focused on the long term interests of their countries, but that they could pursue nationalist agendas without incurring the costs and risks of war. Yet, one possibility strikes me now that we did not develop in the book--in the case of Romania, democratic consolidation was facilitated by corruption--that one could leave power when an election is lost, because the corruption income will be there when you return after a term or two.

So, I do not really have a good answer for the political world, but it is a problem of enduring relevance. For the economic world, I can only hope that the folks who enriched themselves with the obviously short-sighted policies at GM and Chrysler put their money in the stock market, or, better yet, with Bernie Madoff and his ilk. That would be ironic and just.

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