Economics, Part III Political Philosophy and the Economy

Political Philosophy and the Economy


To paraphrase William Shakespeare - "The fault, dear people, is not in our stars, but in ourselves.

The political philosophy which affects the economy is not so much a philosophy of liberal or conservative as it is a matter of what should be under the control of government and to what extent. The extremes are either total control of business or none at all.

We are now suffering the results of 20 out of the last 28 years of no control or oversight of the mortgage and investment industries

While members of each side vary in their idea of what constitutes adequate control liberals lean toward tighter controls and conservatives tend to believe in a hands off approach.

The idea that the companies themselves should be the subject of control is erroneous in both philosophies. The company in and of itself is an inert entity under the control of the men who manage the company. The only aspect of a company that needs to be held in check is the size of the company as it relates to the industry in which it exists. No company should be so large in relation to its industry that it affects the direction of the industry itself.

Past examples of businesses that dictated the direction of an industry existed in the late 1800 with Carnegie Steel/U.S. Steel, the Vanderbilt Railroad Empire and Standard Oil Company.

Each of these companies used different methods to obtain control of the direction of the entire industry in which they existed.

From 1921 through 1929 the Harding, Coolidge and Hoover administrations took the hands off approach to its extreme ending in the disastrous depression of the 1930's.

During the Franklin Roosevelt years, 1932 to 1945, extreme economic recovery measures were taken including many public works programs that put Americans back to work. Roosevelt was blamed for socializing America but the policies that he put in place worked to begin a recovery that was then assisted by the coming of World War II. The necessity of building the American war machine continued the effort to provide jobs and adequate pay for the average American worker.

During the decades of the late 1940's, '50's, '60's and '70's oversight of business continued unabated with modifications as the need arose under both Democratic and Republican administrations and the United States continued its recovery from the Great Depression.

In 1980, with the election of Ronald Reagan, the hands off approach was again in vogue and the relationship of debt to Gross Domestic Product began to surrender the gains it had made in the previous fifty years. The eight years under Reagan cost 18.5% gain in the debt to GDP ratio. George H.W. Bush continued the policies of Ronald Reagan with a 12.2% gain.

The first four years under Bill Clinton resulted in a 3.0% gain as he fought to get the ratio back in the negative direction but started seeing results during his second term with a drop of 9.3%.

With the election of George W. Bush government policy again reverted to a hands off approach and the results of his eight years in office was an 11.9% gain.

In the current economic situation certain companies have become so large within their various industries that they cannot be allowed to fail. Examples of this are the automobile industry which Ford, Chevrolet and Chrysler Corporation dominated. It has been estimated that the failure of any one of the "Big Three" would have resulted in the loss of at least a million jobs in the automobile manufacture industry from suppliers to retail sales. These companies were on the brink of failure as a result of poor decision making and the incompetence of upper management.

The mortgage lending industry started a snowball of problems for other industries through the issuance of sub-prime mortgages with what they called "creative financing". Schemes such as stated income and variable rate mortgages were advanced with full knowledge that the home buyers would eventually fail to be able to make the mortgage payments resulting in foreclosure.

In the insurance industry in which AIG became such a huge entity, in the banking industry there are a number of very large banks that required government assistance to prevent them from going under and in the investment industry Bear/Stearns was forced into merger with J.P. Morgan. The insurance, banking and investment industries were brought to their knees through misguided decisions to invest in mortgage packages containing the sub-par mortgages when the men responsible for the well being of the company failed in their obligations to assess the packaged deals in which they invested

The issue in each instance involves the decisions of management at the very highest levels. The CEO's, CFO's and COO's were either ignorant of the decisions being made and enacted or were complicit in trying to enrich the company and themselves at the expense of the average American. These are examples of incompetence at the very best and unethical conduct at the very worst.

Another issue contributing to the economic recession to an extent are the methods of granting compensation to the highest levels of management. Whether the company performs adequately under the direction of management or not compensation is guaranteed and we never hear of that compensation being reduced due to a company underperforming.

The only exception to this was the decision of Lee Iacocca to accept a compensation of $1.00 per year until Chrysler Corporation turned around under his leadership.

History has prooved that every time that an administration makes a decision that affects anything but the size of the company in relation to its industry it is incorrect. It is not the companies themselves that are responsible for our economic woes it is rather the men who direct these companies and make the decisions.

The elected officials who govern our nation need to enact laws that maintain the ethics of the men who oversee the operations of the companies. These laws need to be armed with teeth that punish rather than just act as a slap on the wrist. It is one thing to see an entire industry affected by outside events but quite another to see an individual company performing poorly as the top level management continues to be compensated at exorbitant levels.

It is necessary that Boards of Directors are held responsible by the shareholders for the competence of the persons they hire to run the companies.

In a letter I sent to the Securities and Exchange Commission in April of 2006 I requested that rules be changed so that compensation would be more open to public scrutiny. http://www.sec.gov/rules/proposed/s70306/lwaggoner040606.htm

It is the American public which holds the responsibility for the economic well being of our nation. Our Congress writes and passes legislation and the president either approves or disapproves that legislation.

Every voter needs to be aware of the impact of political decisions with respect to their effect on the economy and question very closely the proposed economic policies of every candidate for national office.