6/04/2002 09:44:00 AM
by The MinuteMan
Greed is Still Good
Just for a morning’s amusement, I will play picadore
with Krugman’s “Greed is Bad
” column. Krugman takes his inspiration from Gordon Gekko’s classic Wall Street
speech, “Greed is Good”. You might expect that when Oliver Stone and Prof. Krugman team up, the result will be an exciting expose of a vast, complex conspiracy. But evidently, it was Ken Lay in the Conservatory with a Wrench
Krugman begins with an unobjectionable reprise of the late 80’s, when corporate raiders shook up ossified, unresponsive corporate bureaucracies and forced companies to focus on improving profitability:
“The quintessential pre-Gekko corporation was known internally as Generous Motors.
These days we are so steeped in greed-is-good ideology that it's hard to imagine that such a system ever worked. In fact, during the generation that followed World War II the nation's standard of living doubled. But then, growth faltered — and the corporate raiders arrived.
The raiders claimed — usually correctly — that they could increase profits, and hence stock prices, by inducing companies to get leaner and meaner. By replacing much of a company's stock with debt, they forced management to shape up or go bankrupt. At the same time, by giving executives a large personal stake in the company's stock price, they induced them to do whatever it took to drive that price higher.
Did these new managers cut out unnecessary layers of bureaucracy, cut costs, improve productivity, shorten product development cycles, improve supply chain and inventory management, and generally make their companies more competitive? The Professor does not say. However, we learn that:
“And in the 1990's corporations put that theory into practice. The predators faded from the scene, because they were no longer needed; corporate America embraced its inner Gekko. Or as Steven Kaplan of the University of Chicago's business school put it — approvingly — in 1998: "We are all Henry Kravis now." The new tough-mindedness was enforced, above all, with executive pay packages that offered princely rewards if stock prices rose.
And until just a few months ago we thought it was working.
Now, as each day seems to bring a new business scandal, we can see the theory's fatal flaw: a system that lavishly rewards executives for success tempts those executives, who control much of the information available to outsiders, to fabricate the appearance of success. Aggressive accounting, fictitious transactions that inflate sales, whatever it takes.”
The theory’s fatal flaw? The theory always called for proper monitoring of top management. Setting up a corporate governance system with adequate oversight is not easy, and it is clearly true that the oversight has not been adequate in some cases. However, unless Krugman is asserting that it is not plausible that a system with proper monitoring can be devised, then I would hardly say that the flaw is fatal.
Wobbly watch - I wonder if, in a parallel universe, an un-reconstructed socialist is explaining that the underlying theory of the Communist state remains sound, even though the specific implementation in Russia did not follow an optimal path. Hmmm. Well, so much for an attempt at open-mindedness, and on with the diatribe. Back to Krugman:
“It's true that in the long run reality catches up with you. But a few years of illusory achievement can leave an executive immensely wealthy. Ken Lay, Gary Winnick, Chuck Watson, Dennis Kozlowski — all will be consoled in their early retirement by nine-figure nest eggs.
Unless you go to jail — and does anyone think any of our modern malefactors of great wealth will actually do time? — dishonesty is, hands down, the best policy.”
Well, I suppose it would be interesting to get Mike Milken’s opinion on the question of whether any of these guys will be forced to break serve in the hot sun
. And a couple of these tainted executives have committed suicide, which is horrible, but it also suggests that the financial consolation is less than Krugman imagines it to be.
“Now, distrust of corporations threatens our still-tentative economic recovery; it turns out greed is bad, after all. But what will reform our system? Washington seems determined to validate the judgment of the quite apolitical Web site of Corporate Governance (corpgov.net), which matter-of-factly remarks, "Given the power of corporate lobbyists, government control often equates to de facto corporate control anyway."
Perhaps corporations will reform themselves, but so far they show no signs of changing their ways. And you have to wonder: Who will save that malfunctioning corporation called the U.S.A.?
Greed is bad? Dishonesty is bad. And the reform will not come from Washington, but will be forced upon corporations by unhappy investors, just as the reforms of the 80’s were forced upon formerly contented corporate titans by frustrated investors. And his last, plaintive plea for reform of the US is suspiciously lacking in policy suggestions. In a week where we have read about the ossified, bureaucratic and unresponsive FBI missing the trail of terror, I don’t imagine Krugman is calling for a return to the good old days of fat, dumb, and happy bureaucracies.
OK, off to scout the blogosphere. I haven't yet decided if I will award myself points for original thought, or for slavishly capturing the spirit of the echo chamber. My incentive is to cheat, so I expect I will. Away, away...
UPDATE: OK, I'm back. Jane Galt was taking awhile, and I finished first - that's The MinuteMan for you, satisfaction Not
guaranteed. But Ms. Galt Rules
. Check it out now, ignore the cheap objectification and vote her sexiest blogger
, get on with your life. Friday is the next episode of the K-Files.