The Big Three Dama

I’ve been watching the Big Three bailout drama with increasing dismay.  First, the executives from GM, Ford and Chrysler flew in private jets to Washington for a hearing, and then proceeded to beg for $25 billion–without offering a plan as to how the money would help them get out of their present mess.  Congress told them to come back with a plan, and suggested that next time they find a more plebeian mode of transportation. So back the executives came this week, humbly carpooling in the poorly made cars their companies produce, with more detailed plans for restructuring.  The CEOs magnanimously offered to work for $1 a year if they received the bailout money (nevermind that the bulk of their salary comes from stock options and bonuses, not salary).  They presented a plan for laying off workers, closing plants, focusing on core brands, and lowering health care and other costs.  Congress wasn’t exactly impressed, and polls show Americans are not in favor of yet another bailout for yet another mismanaged corporation.

But here’s the problem: the Big Three are just too big to fail.  They directly employ roughly 100,000 people in the United States, but their suppliers across the country employ hundreds of thousands more, and the ripple effect would send our already reeling economy into a tailspin.  It now looks like the auto companies will get their money, albeit only half of what they were originally seeking.  The same “too big to fail” logic was used to justify the bailout of AIG and several other financial institutions.  And, like it or not, in a “centralized” economy, the logic is quite sound.  What concerns me is that “too big to fail” usually means “too powerful to regulate.”

Detroit Fought the Regulations That Could Have Made them More Competitive

I know much more about the ways in which Detroit has fought efficiency standards than I do about the financial industry’s attempts to block regulation, but my understanding is that the trend in both cases is the same.  Large corporations claim that tougher regulations will be too costly to implement, and will force the company to lay off workers and operate at a competitive disadvantage to their competitors.  In Detroit’s case, they have fought tooth and nail against every single attempt to increase the Corporate Average Fuel Economy (CAFE) standards, and a strong argument can be made that as a result of their whining and complaining Toyota and Honda have pushed them to the brink of bankruptcy for the simple reason that their cars are more reliable, more efficient, more safe, and more profitable for the automaker.  In fact, Detroit’s lobbying has been so effective that even China has CAFE standards that are more stringent than the United States!  So instead of spending their time innovating around efficiency, advanced engines, lightweight materials, and alternative fuels, Detroit has been busy pushing its influence in Washington to avoid changing. 

After all, neither Toyota nor Honda, nor any other car companies are seeking bailouts from their respective countries, despite the fact that the economic downturn has hurt everyone.  On top of everything else, it is quite clear that the Big Three have been unbelievably poorly run. I mean, I don’t have an MBA, but I am astonished that GM all of a sudden realized that they only have enough cash to operate for a few months before they go bankrupt. It makes me wonder what the hell these executives learn in business school.

The Need to Decentralize Energy, and the Economy

Here’s where I’m going with all this.  It seems to me that the fundamental tension between the power of large corporations and the need for politicians to regulate them will never be resolved in a satisfactory manner.  And frankly, I don’t think the best answer is simply more effective regulation anyway.  An economy that is overly dependent on an oligarchy of conglomerates is not a stable and robust economy.  Much as I am an advocate for the decentralization of our energy system–using renewables to achieve local and on-site generation of power–because it makes for a cleaner, more reliable and more innovation-driven energy grid, I believe very strongly that our economy should be decentralized as well.

What do I mean by decentralized?  Well, keep in mind that I have spent the last year creating a micro finance program in Providence, Rhode Island.  The idea behind micro finance–and what makes it successful–is that entrepreneurs don’t just come from business schools, but rather from every sector of society, and entrepreneurship doesn’t just take place in medium and large firms.  In fact, some of the poorest people in a society are the most likely to be entrepreneurial–they have to be simply to make ends meet.  What micro credit does is it gives those entrepreneurs the access to affordable capital and auxiliary services (such as business skills training) they need to grow and expand their ventures.  It seems to me that in order to have a vibrant, job-creating, innovation-driven economy, there needs to be a groundswell of informal, micro and small businesses, all of which are competing to serve local and regional markets.  Some of those businesses will grow to become medium and even large businesses, but as long as the little ventures–which are inherently more nimble and responsive than behemoths–are able to thrive, they will ensure a proper balance is struck between big and small.

The Benefits of Decentralization

A decentralized economy isn’t shackled by several large entities that have a stranglehold on politicians.  I’m excited to see new automotive ventures springing up all over the United States and the world, including Tesla Motors, Aptera and Tata, all of whom are challenging the big guys.  And who knows, if Detroit goes belly up, maybe the next generation of automakers will be smaller, nimbler and more adaptable.  Many of these new companies are coming out of Silicon Valley–a place that is used to rapid and constant innovation.  Granted, losing even a handful of giant corporations will send a shock to the economy and cause economic hardship for hundreds of thousands.  Allowing this to happen would have to involve a coordinated effort by the government to provide benefits to those that have lost work while at the same time offering a program to retool those workers to quickly get new jobs.  Finally, the government would need to implement policies that benefit the emerging companies so that they can grow and hire new workers.  How is this different than the previous paradigm?  Simply put, the new guys don’t have the same political sway–I mean, Rep. John Dingell is basically the spokesperson for Detroit in Congress–and it is highly unlikely that new policies would be crafted merely to benefit one company or sector. 

Change isn’t only coming to Detroit.  New banks are emerging to challenge the dinosaurs of the industry.  For example, New Resource Bank in San Francisco–which was started just three years ago–is actually growing despite the economic downturn.  Why?  For the simple reason that New Resource Bank is devoted to financing environmentally friendly projects, which unlike mortgage-backed securities, offer tangible, traceable returns on investment that are good for investors and the environment.  And here in Providence, I’m working to create an innovative community development credit union that does green micro finance.

I hope that Big Coal, Big Oil, Big Bank and Big Car are replaced by dozens, hundreds, and thousands of energy, transportation, and financial entities.  For the health of our economy, our political process, our society and our environment, it’s time we decentralize and democratize energy, enterprise and the economy.  I think Americans are getting sick of the fact that taxpayer money is being used to bailout incompetent, poorly run, and highly unethical companies.  After all, in a free market, incompetence is to be punished, not rewarded.  But because of our centralized approach, that does not hold true if the incompetence comes from a company that is “too big too fail”.  Of course, my whole argument is that “too big to fail” tends to also meand “too big to regulate,”–which often leads to their failure.  But that may not even be the biggest downside to conglomerates.  What I’ve attempted to demonstrate is that when power and wealth is concentrated in the hands of only a handful of people running a handful of companies, it’s bad for everyone (with the exception of those handful of people).  Thoughts?