Corporatism Kills

Time to be honest about the death of American industry.

The right consistently defends corporations because corporations provide jobs, boost the economy, and produce products we like at prices we will pay; the left consistently attacks corporations because they don’t “pay their fair share,” they kill small businesses, and they spend too much money on their executives and plush jets.

Both sides are right, and wrong.  The right is correct in that corporations create tremendous numbers of jobs, and they produce products we like.  But they’re wrong in that corporations don’t provide enough jobs, and they don’t engage in honest competition, which means their prices aren’t the ones we should be paying.  The left is also correct: corporations do get special treatment and the playing field isn’t level.  But they’re also wrong when they attack corporations as right wing stooges who are abusing the power of the free market.

The truth is that corporations aren’t capitalist actors.  They are profit-driven actors.  Chiefly, this means that if they can cut great deals with the government in order to lock out their business competitors or direct taxpayer cash into their own pockets, they’ll do it with alacrity.

Corporations don’t provide enough jobs because they are subsidized and therefore uncompetitive.  They are protected by tariffs and friendly legislation.  They ensure that regulations hurt the little guy more than they themselves are hurt.  They work hand-in-glove with government to grab some of the government goodies.  Even great American entrepreneurs like Thomas Edison tended toward such corporatism.  “A lawyer cannot draw a law covering the complicated conditions of modern industry,” he said midway through his illustrious career, advocating his control of all of American economics.  “What is wanted is some person familiar with the selling and buying, the technical as well as the financial end of all industries, to devise some generic scheme that business can work on.”  Today, Edison’s intellectual successor, Jeff Immelt, says exactly the same thing – government and corporations must work together.

Here’s the typical history of corporations.  They begin as small businesses that use the freedom of the market to produce great products at low prices.  Slowly, they consolidate more and more market share.  At this point, the government, spurred by press coverage over the “inequitable state” of the industry, intervenes.  Generally, their regulation takes the form of support for union goals, since unions can generate votes and monetary support.  Suddenly recognizing the power of government, corporations then parlay with the government in order to secure their market share. Large corporations work closely with government to secure subsidies, beneficial legislation, and tariffs that protect their domestic market.  Overall, this leads to consumers paying more for products and spending their tax dollars supporting increasingly bloated corporations.

In the short run, it’s a great deal for corporations.  They get to nail the consumers twice – once as consumers, and once as taxpayers.  They get to prevent competitors from entering the market.  They get to stop foreign competition from providing cheaper products.  In many cases, they get tax breaks.

In the long run, however, corporatism is devastating for industries.  The Cuban sugar industry provides a perfect case study.  Prior to the communist takeover of Cuba, the U.S .was the largest buyer of Cuban sugar, purchasing nearly 60 percent of their exports.  Once Castro grabbed power, the U.S. initiated an embargo that nearly crippled the industry.  The Soviet Union filled the gap, and Cuba’s sugar business boomed once again – but only because the Soviets subsidized it heavily.  Over the course of time, the Soviets were forced to spend more and more money on Cuba.  No longer was Cuba competing on the world market; now it was getting special benefits from its master.  Cuba’s sugar industry became a paradigmatic representation of the regulatory-subsidization model.  In the late 1980s, the Soviets bought up between 50 and 60 percent of Cuba’s sugar exports at an insane markup, and brought cheap oil to the island country.  In 1987, the Soviet Union paid Cuba a whopping $0.42 per pound for sugar, even though the average world price was $0.06 per pound.  That was actually the low water mark for the 1980s.  During that decade, over 80 percent of Cuban sugar was exported to the Soviet Union.  At the same time, the Soviets sent oil so cheaply to Cuba that Cuba began re-exporting the oil at a normal world mark-up to make money.

Then the Soviet Union collapsed.  So did Cuba’s sugar industry.  In 1988, Cuba was the world’s third largest sugar producing country.  By 1995, it had fallen to number eight.  By 2005, it was down to number 17.  Today, Cuba’s sugar economy is nearly dead.  Subsidies may float industry for a while, but in the end, they kill it.  Companies and industries live up to the market, or they live down to their subsidies.  Meanwhile, consumers and taxpayers have to swallow the cost.  Just ask the citizens of the Soviet Union, who had to suffer through severe sugar shortages in order to ensure that Fidel could afford to smoke his cigars.

We’re seeing the same thing in today’s United States.  The government’s bailout of Chrysler, it was reported this week, lost the taxpayers some $1.3 billion.  That was on top of all the subsidies and tariffs from which the US auto industry has benefitted, jacking prices up for American consumers.  America’s auto industry is dying because of corporatism – government regulation of and on behalf of industry.

The car industry isn’t alone.  We’re watching the same process in virtually every American industry.  We must realize that the death of American industry isn’t the fault of mythical free market corporations – it’s the result of the toxic and incestuous relationship between corporations and the government.  We, the citizens, consumers, and taxpayers, pay the price.