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2009-03-01 BACK
Privatize Profit, Nationalize Risk
Privatize Profit, Nationalize Risk This article originally appeared in the Texarkana Gazette on March 2, 2009 Dr. Mohammed Ashraful Haque, Professor of Finance, Texas A&M-Texarkana College of Business In recent times there have been quite a few incidents, in the United States and worldwide, where private businesses had to be rescued by the government with taxpayers' money. This should not happen in a perfect capitalist system. The banking industry got in trouble purely because of poor management. The top executives made the decisions that adversely affected the performance and profitability of their bank (and the entire banking industry) and yet they often were rewarded with big bonuses on top of their executive pay. In a free competitive market, if the government bails out a business instead of letting them suffer the consequences of their own actions it only encourages poor decision making, by that business and others. The banking industry is in trouble because of poor investment decisions. Bailing out the banks without natural consequences will only get us more of the same. When a bank believes that the government won't let them fail, a condition known as moral hazard exists. This occurs when bankers feel their actions can potentially offer great returns without being exposed to great risks. In this case the self-governing of behavior doesn't occur and too many risky ventures take place. Capitalism doesn't eliminate all risky behavior. It just eliminates organizations made to suffer the consequences of their too risky behavior. There has been much talk about bailing out the auto industry. Many people blame the problems of the auto industry on the high wages of the auto worker. If you compare the wages of the auto workers in Europe, U.S. auto workers make much lower than their counterparts in Europe. I don't believe the primary issue is with wages earned by labor. Take the Japanese. They successfully learned to compete in manufacturing automobiles in the United States because they learned to be much more efficient and how to make better automobiles. That is so because the Japanese automakers reinvest a big chunk of their profit in new technology while their U.S. counterparts failed to make these same reinvestments in technology. Unions argue that U.S. automakers too often let the compensation of their executives, paid at a much higher rate than their Japanese counterparts, eat up the profits that could have been reinvested in technology. The U.S. auto industry needs to reinvest in new technology in order for them to remain competitive in a global market. You cannot have it both ways. Privatizing profit (companies receive rewards) and nationalizing risk (taxpayers receive consequences) will only encourage inefficient management. In a free market, there has to be survival of the fittest. Bailing out a failing industry with taxpayers' money rarely is successful in the long run. If you enter the market to make a profit, you must also be ready to bear the consequences. There is no reward unless you take risk. If a poor performer fails in the market, it will pave the way for a more competitive and efficient performer to enter the market. It is obvious that failure of the auto industry would mean the loss of thousands of jobs. The important thing is these are basic employment jobs. According to the U.S. Department of Commerce, one basic employment job creates 270 service employment jobs. This means the loss of these jobs will have a ripple effect and would mean the loss of many service employment jobs. Therefore, it seems important to save the auto industry. This may seem to save the jobs in the immediate future, but unless the auto industry is required to reinvest in technology and be able to compete in the global market, the same situation will reoccur again in a few years. Therefore, if the auto industry is rescued there must be some strings attached to restrict distribution of profits and requirement of reinvestment in new technology to be able to compete effectively in a global market. On the other hand, currently there are talks in Washington to nationalize some of our banks. That will only lead to poor management causing more damage. The banking industry got into this situation because of inefficient management. The banking industry needs to be more heavily regulated to prevent this kind of failure to reoccur in the future. The private sector would be most efficient and productive if properly regulated. You cannot privatize profit and nationalize risk, if we do that, the burden of inefficient management falls on the public. If the banking industry and the auto industry are rescued, they must be monitored closely by watchdog agencies to make sure they conform to the conditions as identified in the rescue plan. Unless they are closely monitored to make them conform to the conditions set forth in the rescue plan, then a few years later we will have the same problem again. And nobody wants that to happen again in our lifetimes. Dr. Haque can be reached at Mohammed.Haque@tamut.edu.
TOP
Privatize Profit, Nationalize Risk
Privatize Profit, Nationalize Risk This article originally appeared in the Texarkana Gazette on March 2, 2009 Dr. Mohammed Ashraful Haque, Professor of Finance, Texas A&M-Texarkana College of Business In recent times there have been quite a few incidents, in the United States and worldwide, where private businesses had to be rescued by the government with taxpayers' money. This should not happen in a perfect capitalist system. The banking industry got in trouble purely because of poor management. The top executives made the decisions that adversely affected the performance and profitability of their bank (and the entire banking industry) and yet they often were rewarded with big bonuses on top of their executive pay. In a free competitive market, if the government bails out a business instead of letting them suffer the consequences of their own actions it only encourages poor decision making, by that business and others. The banking industry is in trouble because of poor investment decisions. Bailing out the banks without natural consequences will only get us more of the same. When a bank believes that the government won't let them fail, a condition known as moral hazard exists. This occurs when bankers feel their actions can potentially offer great returns without being exposed to great risks. In this case the self-governing of behavior doesn't occur and too many risky ventures take place. Capitalism doesn't eliminate all risky behavior. It just eliminates organizations made to suffer the consequences of their too risky behavior. There has been much talk about bailing out the auto industry. Many people blame the problems of the auto industry on the high wages of the auto worker. If you compare the wages of the auto workers in Europe, U.S. auto workers make much lower than their counterparts in Europe. I don't believe the primary issue is with wages earned by labor. Take the Japanese. They successfully learned to compete in manufacturing automobiles in the United States because they learned to be much more efficient and how to make better automobiles. That is so because the Japanese automakers reinvest a big chunk of their profit in new technology while their U.S. counterparts failed to make these same reinvestments in technology. Unions argue that U.S. automakers too often let the compensation of their executives, paid at a much higher rate than their Japanese counterparts, eat up the profits that could have been reinvested in technology. The U.S. auto industry needs to reinvest in new technology in order for them to remain competitive in a global market. You cannot have it both ways. Privatizing profit (companies receive rewards) and nationalizing risk (taxpayers receive consequences) will only encourage inefficient management. In a free market, there has to be survival of the fittest. Bailing out a failing industry with taxpayers' money rarely is successful in the long run. If you enter the market to make a profit, you must also be ready to bear the consequences. There is no reward unless you take risk. If a poor performer fails in the market, it will pave the way for a more competitive and efficient performer to enter the market. It is obvious that failure of the auto industry would mean the loss of thousands of jobs. The important thing is these are basic employment jobs. According to the U.S. Department of Commerce, one basic employment job creates 270 service employment jobs. This means the loss of these jobs will have a ripple effect and would mean the loss of many service employment jobs. Therefore, it seems important to save the auto industry. This may seem to save the jobs in the immediate future, but unless the auto industry is required to reinvest in technology and be able to compete in the global market, the same situation will reoccur again in a few years. Therefore, if the auto industry is rescued there must be some strings attached to restrict distribution of profits and requirement of reinvestment in new technology to be able to compete effectively in a global market. On the other hand, currently there are talks in Washington to nationalize some of our banks. That will only lead to poor management causing more damage. The banking industry got into this situation because of inefficient management. The banking industry needs to be more heavily regulated to prevent this kind of failure to reoccur in the future. The private sector would be most efficient and productive if properly regulated. You cannot privatize profit and nationalize risk, if we do that, the burden of inefficient management falls on the public. If the banking industry and the auto industry are rescued, they must be monitored closely by watchdog agencies to make sure they conform to the conditions as identified in the rescue plan. Unless they are closely monitored to make them conform to the conditions set forth in the rescue plan, then a few years later we will have the same problem again. And nobody wants that to happen again in our lifetimes. Dr. Haque can be reached at Mohammed.Haque@tamut.edu.
TOP