My favourite chapter in The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too examines the role of the modern company, elements of which Galbraith believes have hijacked the US government. Crucially, the modern firm is very different to the monolithic, IBM-like entities which dominated the landscape prior to the Reagan revolution of the 1980s. Those firms were gravely weakened by then-Treasury secretary Paul Volcker in his quest to crush inflation. He succeeded, but the cost was high, both for contemporary blue-chips who had to deal with a sharply stronger dollar and a recession, and for the debt-laden nations of the Third World, which saw their debt servicing costs shoot up and their efforts to catch up with the West set back by decades.
"Monetarism would blow the great American industrial firms apart, for the double-digit interest rates Volcker and Reagan brought on in 1981 had...catastrophic consequences on the sector," writes Galbraith. "Suddenly anyone who could still purchase equipment could get it cheaper from Japan or Germany."
The consequences of VolckerÆs actions were far-reaching. Companies increasingly bypassed the banks, which were reluctant to lend during a recession, and began to access the capital markets directly. Many talented executives with technology expertise bailed out, and also used the capital markets to fund tech start-ups. Thus was born an alliance between Wall Street capital and technological entrepreneurship.
The gigantic incomes earned by the entrepreneurs during the tech boom had a cascading effect on the rest of the corporate sector in the form of ever-higher CEO compensations based on rising share prices. As new Wall Street metrics emerged to determine the life or death of a company, companies lost control of their CEOs. The latter put their stock investors first by manipulating short-term corporate performance and boosting the share price. Techniques like share buybacks conveniently also enhanced the CEOs own personal stock holdings. Reductions in capital gains taxes enacted under President Reagan also made it feasible for companies to succumb to pressure to pay much higher dividends and executive compensations.
The downside was that huge payouts and stock buybacks reduced the capital cushion of the firm û as companies are now finding out. And most unfairly, the tax cuts on capital were not matched by tax cuts on labour, points out Galbraith.
A new breed of imperial CEOs appeared, "a class of oligarchs, who would serve as parasites on the firm", in Galbraith's words. The obscene incomes earned by the CEOs shattered the previous system of restraint. Traditionally, CEOs were kept under control by powerful boards who would decide the perks the CEO enjoyed. Corporate apartments, jets and entertainment allowances were granted at the whim of the company. But when CEOs like Dennis Kowzlowski of Tyco International began to pay themselves $100 million per year, the role of the company diminished. CEOs were able to provide their own perks, out of their own incomes.
This creation of the super rich naturally has political repercussions, and Galbraith argues with some force that business lobbies have taken over the US administration. He coins the term æcorporate republicÆ to describe the supine role of Congress vis-a-vis the executive branch. He likens this to the pathetic performance of corporate boards in preventing the self-destruction of many financial institutions in the present crisis. Indeed, the lousy corporate governance apparent in the real economy is paralleled by similar shortcomings at the political level, with the president and his cronies behaving in the same way as the unaccountable 'imperial CEOs'.
Galbraith describes an essential truth about companies and their executives: they are not capitalists. Though many business leaders describe themselves as capitalists, they are anything but. They thrive on opacity, secret government contracts, propaganda and corruption. They also tend to refuse consumer- or environmentally-friendly regulations that make their jobs more difficult. As a result, the US car industry has fallen sharply behind the car industry of Japan, where regulations have forced the Japanese companies to produce a new generation of environmentally friendly and fuel efficient vehicles. GalbraithÆs solution is for a stronger government, independent of business lobbyists, to impose a slew of standards in such a way as to benefit the country as a whole.
He also has some interesting insights about the dollar. Ironically, VolckerÆs recession made the dollar a superstar, and reaffirmed its status as the worldÆs reserve currency. As it soared in value, demand for it increased. Countries started hoarding the greenback, creating a self-sustaining economic bubble in the US as the Federal Reserve printed banknotes to fulfil the demand. He rather terrifyingly suggests that as the US dollar weakens today, another Volcker could emerge and strengthen the dollar by restraining its supply. The short-term effect on the rest of the world would be æcataclysmicÆ, however.
Many of the macro issues Galbraith discusses are reasonably familiar attacks on dogma relating to balanced budgets, free trade and tax cuts. His aim is to show that these terms are propaganda that mask the fact that the business sector tends to seek precisely the opposite outcomes. He notes that deregulation does increase profitability, but at the expense of the taxpayer and consumer. How true, in light of the trillion dollar losses the US taxpayer is now paying to bail out the banking sector.
Does this make Galbraith anti-business? Not at all. He is just an old-fashioned capitalist who wants to see some genuine competition, innovative and honest businesses, and a well-compensated and well-educated workforce. For that, he argues, you need a strong, fair government. In a world where the Madoffs of this world increasingly seem to outweigh the real businessmen, his call rings out like a clarion call. LetÆs hope it will be heard.
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