Living inside the Beltway, I’m acutely aware of how much time, money, energy and creative thinking are poured into struggles over how the federal government should regulate business. The winners in this game are the powerful: Republicans, Democrats, corporate America, government employees and the industry associations, law firms and lobbyists who keep Washington’s restaurants full and its upper-end real-estate market healthy, even as the real economy struggles. The losers are everybody else.
The way out of this conundrum, I’ve come to believe, is, first, to radically shrink the size and complexity of the government. Then, regulate modestly, carefully but aggressively when necessary—in such areas as energy/climate and banking. Then, allow markets to do what they do well, which is create wealth.
Three recent stories from The New York Times and one from the Wall Street Journal that just got my attention prompted me to offer up these ideas. The headlines:
These stories share a common theme. The show how big corporations exercise influence in Washington (or are just starting to, in the case of Facebook) in ways that damage their competitors, consumers or taxpayers. The Times’ GE story—which should be required reading in college government classes—is the most shocking and revealing, reporting, as it does, that GE in 2010
reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.
Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.
It goes on to say that “one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.”
GE’s not to blame for this. (Although the next time a GE exec talks to be about “corporate citizenship,” I’ll be tempted to remind him that good citizens don’t go out of their way to avoid paying taxes.) As a GE PR woman noted: “We have a responsibility to our shareholders to legally minimize our costs.” The fiendishly complicated tax system is an invitation to big companies to seek legal ways to avoid taxes. It’s a full-employment act for tax lawyers—GE’s tax department employs 975 people. Think about that—nearly 1,000 very well paid people go to work every day at GE looking for legal ways to reduce the company’s tax burden, instead of working to create products or services that do something useful for GE’s customers. In 2008, when lobbying over tax law was intense, GE spent $18 million on in-house lobbying and another $3 million on outside lobbyists, according to the Times. This, too, is money spent unproductively.
I’ll leave it to economists to argue over what the “right” level of corporate taxes should be, and to explain who really pays corporate taxes. (Shareholders? Employees? Customers?) But while I’m not naïve enough to think that a $150 billion company like GE can file the equivalent of a 1040EZ form, I’m sure that a simpler tax system with fewer tax breaks and incentives of all kinds – for hiring, for investment, for clean energy, for goodness knows what else – would invite less gaming of the system, not to mention allowing all those tax lawyers and lobbyists to do something more meaningful and, I’d bet, satisfying with their lives.
The AT&T story tells a similar tale, focused on the company’s chief lobbyist, Jim Cicconi, who, among other things, sent 1,500 Georgetown Cupcakes to the FCC last winter. (No wonder my cell phone bills keep rising.) Cicconi is now entrusted with getting AT&T’s $39 billion merger with T-Mobile through the regulators.
Here’s how The Times describes the scope of Mr. Cicconi’s lobbying efforts:
He oversees a division that spent $115 million on lobbying over the last six years, putting it among the top five corporate spenders in the country, according to the Center for Responsive Politics….
AT&T employs an army of outside lobbyists, including at least six prominent former members of Congress, including the former Senate majority leader Trent Lott, a Mississippi Republican, and former Senator John Breaux, a Louisiana Democrat.
Over the last two decades, AT&T employees and its political action committees have pumped more campaign contributions into federal politics than any other American corporation, the Center for Responsive Politics reports. In the last election cycle, AT&T contributions found their way to 390 representatives and 70 senators.
This is how government meddling and complex regulation benefit elected officials and their staff — with campaign donations when they are in power and jobs when they leave.
You know, people who favor more government and dislike lobbying can’t have it both ways. One begets the other. The more power that’s concentrated in Washington, the more corporate America will turn its attention here.
The WSJ’s furniture story illustrates an especially perverse outcome of the over-regulated economy. Since 2005, Chinese manufacturers of wooden bedroom furniture have been subject to “anti-dumping” duties after regulators decided that they were selling furniture in the U.S. at “less than fair value,” whatever that means. Trade law allows U.S. manufacturers hurt by the “dumping” to submit to the government a list of the Chinese exporters for review.
What happened next is, well, creative. In order to be kept off the list, and to avoid being investigated for “dumping,” the Chinese furniture makers paid cash to their U.S. competitors. “Clever shakedowns” is how one trade lawyer described these payments. About $13 million was paid to a group of U.S. furniture makers including the aptly-named Laz-Z-Boy Inc. from 2006 to 2009, according to a report from the U.S. International Trade Commission cited by the Journal.
Who pays? Anyone who bought wooden furniture. Instead of competing, U.S. and Chinese furniture makers are colluding and prices are higher than they would be (if only because they reflect the payments from the China firms to the U.S. firms). Who benefits? Not U.S. workers—neither the shakedowns nor the duties have slowed the growth of furniture imports, although some production has moved from China to Vietnam to avoid the import aggravations. (Hat tip to an American couple who began making hand-carved furniture in Shanghai, refused to make the extortion payments and exposed the practice.)
By the way, what’s dumping? If it’s selling a product for less than it cost to make it, the practice can’t last. Why should government interfere in decisions between private buyers and sellers? As David Ricardo and Matt Ridley have shown, trade is the engine that drives specialization and wealth-creation. (See China, cappucino and cell phones: reasons to cheer.) It’s what allows each of us to do what we do.
So what form might simple, effective regulation take?
In the climate arena, it would look like a carbon tax or a revenue-neutral cap-and-trade system that is designed to accomplish one thing and one thing alone—capture the costs of burning fossil fuels as they emit global warming pollutants into the atmosphere. No more special “incentives” breaks for oil, coal, nuclear, solar, wind, electric cars and the like.
In the banking arena, simple regulation would put a limit on the size of financial institutions, so that none are permitted to grow too big to fail. As we should have learned by now but haven’t, when very big financial institutions fail, the government will not–perhaps for good reason–sit by and let them drag down the economy. Ergo, don’t let banks get that big and when they fail, let them fail. Fewer will fail if they know that taxpayers won’t come to the rescue.
The alternative is ever-increasing government involvement in the economy, complex rules and the phenomenon known as regulatory capture – where government agencies that are established with the best of intentions to regulate industry end up serving incumbents, at the expense of their competitors and consumers.
Markets are flawed, too, of course. But they tend to self-correct in a way that Washington does not. Instead, government grows, GE hires tax specialists, AT&T and Facebook bulk up their lobbying and furniture makers turn to trade lawyers.
Then they stick the rest of us with the bill.