This post will not attain the lengthy status of some of my rants, but I thought it was a thought worth sharing for general interest as the election season heats up.
We hear a lot these days about the need for our government to mitigate the negative impacts of bad business practices on investors and consumers. We’ve heard a great deal about cities like Detroit that would supposedly be brought to ruin if we didn’t come to the rescue of the big businesses that keep them alive. Barely alive, though it may be.
But here’s a little story for you to ponder.
In the western United States, there are large swaths of forest in dry climates populated almost entirely by pine trees. The forest floor is traditionally fed by debris from the trees above and consists of a number of organisms that actually fed on decaying matter from dead timber. In the mid-20th century, we began to perfect forest fire control procedures in the intermountain west (in the name of wildlife preservation, not to mention property protection). The state and national parks became manned with forest service employees whose job it was to look for fire just as it was beginning and douse it. Smoky the Bear began to tell everyone in the country that “Only You Can Prevent Forest Fires!” And fires did indeed drop substantially. And then a curious thing happened. The forests began to die.
You see, we tried very hard to prevent the death of the countless acres of forest that might be burned by the natural process of growth, drought and fire that has worked in the west for many eons and in so doing…we nearly killed the forest. Why? Natural systems that rely on the cycle of raw material require death and destruction to flourish and stay fresh. Critters eat burned out plant material after it begins to rot. It gets used to make homes for countless species. And the trees themselves can’t make new offspring until their pine cones are burst open by the heat of fire (an ingenious way of spreading pine seeds in the right proportion…too many and all the trees would choke each other out…too few and there’d be no replacements after tree death…but if new trees only grow when the old ones get torched…the forest stay in balance). We learned that sometimes, a forest has to burn. We even began doing routine controlled burns to keep everything fresh and prevent massive fires caused by the presence of too much fuel.
The economy isn’t so different. It, like the forest, is a natural cycle that depends on the constant refreshment of raw materials…from materials to products to money and waste and back again. The economy, like the forest, dies if businesses don’t get pruned or burned away…small businesses (and even large ones) live off of the decaying material of old, failing ones. Every time a big company hits chapter 11 or even chapter 7, a hole in the market canopy is made for someone else to fill that market demand and the materials on which that business flourished are still there to be used. They get sold to the highest bidder and the cycle begins again.
The reason this is less apparent now than it was 150 years ago is that government is in the way of the natural order of things. Take GM, for example. When the bailout was made in 2009, the argument was that if we let GM die, a whole region of the country would crumble and the hardship would destroy the economy and impact too many people. Beyond the tens of thousands that would lose their jobs at GM, there were the millions of people who depended on the economy boosting effects of a large multi-national corporation to survive. Detroit became wholesale dependent on General Motors to survive as a city for four reasons:
1) The company was allowed to get too big to be sustainable by constant Federal assistance (either i the form of direct bailouts or in tax breaks and subsidies – meaning too much of the economic canopy was blocked by GM.
2) Government assurances that GM was too big to fail allowed GM execs to crush competition with risky business practices that few other companies could get away with.
3) Oppressive government hyper-regulation of business (which always favors big labor and big business over small, competitive, mobile businesses) prevented new businesses from starting in Detroit.
4) National standards in corporate taxes (payroll taxes, capital gains taxes, etc) are not competitive with the global market place – GM could absorb the costs because they were too big to fail and the government had their back…but smaller businesses had to pull up and leave town for China.
With the help of government, the Detroit part of the forest became dominated by one ancient, gnarled, overgrown tree that gave nothing back to the forest floor…and all was death. The city collapsed as all of the capital in GM stayed in GM and it did nothing for the economy of Detroit. So what is a conservative to do now…GM is giant and if it dies, a bare, dry, resourceless forest floor will not produce more trees. Even if you want to make this argument, the reason it became like this was government intrusion on industry. But I think this argument fails too.
If GM collapses, its’ debters will take shares of its’ assets. Many tens of thousands of stockholders will have lost a lot of capital, no doubt, but the company’s hard assets (material goods, land, and personnel) will still exist. To recoup on some of the debt, other, more successful business owners will have the chance to bid on those hard assets. GM will receive new leadership, and, since there’s not much that can be done with a car factory but..um…make cars…there’s a good chance that the dead tree on the forest floor will become home to half a dozen saplings in the form of smaller car companies…or perhaps one smaller tree that leaves more room for competition from other trees on the perimeter of GM’s clearing. (I know I’m stretching the metaphor a tad, but bear with me).
It will hurt, in the short term, but it simply isn’t the case that the death of a large company results in the collapse of its’ entire market. History is littered with the collapses of huge companies. The market demand doesn’t go away just because the business does.
Of course, a free market doesn’t work in the international community because we are outcompeted by international markets that are neither free nor fair to their workers the way we are. Or so say leftists. I would argue that if we made our government less ambitious, the freedom to operate a successful business would be a far more powerful engine for true wealth creation than any slave labor they might get in China to cut costs. But it all begins with international tariffs and lower corporate taxes and far…FAR less government regulation and tax write-offs for powerful investors.
And then…when a business fails…we have got to let it burn. Take a tip from mother nature, granola-chewing hippy wussies…she’s trying to tell you something.