Friday, December 12, 2008


Events dictate that I rearrange my series schedule. Instead of discussing the role of "globalization" in the "New Economy," I will talk now about the effect of the growing role of government as the major stake holder in the private sector.

We are now on the verge of Uncle Sam moving from acquiring banks and other financial institutions, to acquiring manufacturing assets. The Senators who voted against the rescue for Motor City's motor makers did have an excellent point, they insisted that, for the companies to be competitive, they had to pay wages on the same scale as their hot competitors, i.e. Honda, Toyota, Nissan and BMW, PAY IN IN THEIR US FACTORIES. Anyone who wanted to understand whey the "foreign" makers were doing better simply had to look at the difference in wages they paid to their American workers and the wages paid by Detroit. By the way, weren't all those jobs in Honda America "outsourced" from Japan?

No matter, Uncle Sam with its massive influx of funds from T-Bills has enough dough to buy up General Motors. I guess that will give real meaning to that old line, "What's good for General Motors, is good for the USA." The main debate will be how the Feds deal with restructuring the auto makers after it becomes a major, if not the principal, owner of the companies. Then we will see our law makers duking it out over how a "publicly owned" business treats its work force. I believe this was the major hurdle Renault had to overcome to survive in the auto business, definitely a potential dilemma for incoming President Obama.

Funny, the Senators who voted against the auto rescue plan for fear of growing government control of the private sector, have acted to insure that this will happen in a more direct way. Instead of being a lender to the industry, Uncle Sam will be an owner. Talk about unintended results.

Now let's review the situation. The "Financial Crisis of 2008" - too early to call it "Great" - has allowed Uncle Sam to acquire a massive stake in our financial industry. He has acquired large stakes in the major banks and sundry financial groups, the largest insurance company, and the heart of our mortgage industry. Enter becoming the major owner of the very symbol of America's industrial might, the auto industry. And right around the corner lurk the aviation industry, energy, and health care. Who knows, maybe his future acquisitions will be Microsoft and Google? Well the Feds did create the Internet so this would not be Terra Incognita for them.

Now as you all know I am a solid Republican and avowed opponent of higher taxes. But then I fed too long at the public trough to fear "intrusive or insidious" spread of government in the private sector. We already learned a great lesson in the
1990's when the Republican Congress stopped Federal government spending - we all feed at the public trough, some of us are just closer to it. That short suspension of spending sent the economy into a tailspin. Republican legislators quickly learned that being against the government's growing influence in our economy was akin to being against motherhood.

I take a fundamentally different stance on government's growing ownership of the private sector. Rather than seeing it as a threat, as an opponent of higher taxes, I see this as the perfect solution to expected budget deficits. Instead of having to raise taxes, Uncle Sam will be able to pay for future spending increases out of his earnings on his investment portfolio.

You will remember that President Bush tried to move the Social Security System to a more fiscally responsible operation by allowing payees to invest part of their payroll taxes in the private sector. He was defeated by those crying out against breaking into the "Locked Box," led by Al Gore. Not to spend too much time on it, but you have to understand that, by law, all surplus Social Security funds, i.e. funds collected, but not required for current expenditures, may only be invested in US Treasury Bonds, i.e. Federal debt. This is usually described as using payroll taxes to fund current expenditures, but this is actually done by issuing bonds to Social Security, i.e. borrowing from Social Security. As an aside, I say to all those who lament our growing federal debt, that they should applaud that debt, since without it, there would be no place to invest surplus Social Security funds.

The problem with investing Social Security funds only in federal debt is that this yields relatively low earnings, since the bonds yield low returns - in fact, at the present they pay zero or negative interest. Those arguing for allowing payroll taxes to be also invested in the private sector simply wanted to make the fund operate like any other retirement system, i.e. have a balanced portfolio of investments that offers a higher, yet still conservative, rate of return. This higher rate of return would have allowed the Social Security System to continue to meet increasing expenses without raising the payroll tax.

Well "privatizing" Social Security didn't work. So what we could not do by formal plan, may be achieved by a circuitous route. As it acquires its massive pile of private sector assets Uncle Sam will have a major new income stream, i.e. earnings on those assets,. These new earnings will allow him to cover future increases in Social Security payments, as well as Medicare and Medicaid and other government expenses. For an old tax opponent like me this is great news.

Of course there remains the question of how the Feds will use their new control over private business? We have plenty of examples of poorly run state enterprises to cause concern. To be more specific, how will an auto industry, whose largest share holder is Uncle Sam, respond to labor demands? On the one side he will have to placate workers, who are voters, on the other side he will have to preserve his earnings as an investor that he will need to pay for public expenditures. I see a whole new branch of economics coming into fashion, "Government Management of the Economy" or perhaps, "Public Private Policy?"

Since I take great pleasure in seeing perverse humor, I smile when I contemplate Marx teaching Adam Smith and vice versa.

Leo Cecchini

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