“Equity” is the buzzword around Washington as it considers the financial bailout proposed by the Administration. Democratic Congressmen and Senators are demanding, among other things, that Washington get an equity stake in the companies that benefit from the bailout. It seems like an eminently fair concept: if the U.S. taxpayers are going to spend hundreds of billions of dollars to save financial services firms, shouldn’t they be positioned to make money from those firms’ financial recovery?
But this impulse to allow the government to take ownership interests in businesses who get help from the government is a dangerous one. If followed consistently, it could result in nothing less than a socialist takeover of the factors of production, the flight of thousands of businesses from our shores, or both. An overreaction, you say? Consider the following:
- The federal government give grants to small businesses (and some large ones) on a regular basis to the tune of billions of dollars a year. These grants, for everything from conducting basic research to developing minority-owned firms, are intended to promote national interests and policies that (the argument goes) wouldn’t otherwise get funded appropriately. If the government should take equity interests in businesses who are SELLING assets to the United States, assets which may very well turn the government a profit, why wouldn’t the government be entitled to equity from organizations who get taxpayer money for free?
- The government already has the functional equivalent of an “equity” stake in every American business. Think about what equity — to most of us, a share of stock — gets the average investor. It gets us control (proxy votes), return (dividends) and value (the market price of the share). Well, the federal government already exercises more control over American business than any individual shareholder. It sets workplace conditions, requires environmental, health and safety controls, and demands transparent corporate governance, among hundreds of other legal requirements. And it has the enormous power of the courts, the police, and if needed, the military to enforce its judgments. Compare that with the stockholder’s one-time remote control vote on the board, and it’s hard to imagine why the government needs equity to push the company around. As for return, the government has total control over the amount of money it gets from each profitable corporation — through tax policy. If the government wants a 100 percent “dividend” from American corporations, that is fully within its power. If you’ve ever gotten a dividend check, you know that’s not the way it works for shareholders. The question of value is the only one where the shareholder may have the upper hand on the government. A shareholder can convert its investment into value at a moment’s notice through the markets, assuming there is a buyer. The government is not similarly situated, but do we want it to be? Imagine the impact on Morgan Stanley’s shares if the government decided to sell its 10% stake to fund a Social Security shortfall. Sure, the taxpayers get “value” for its investment, but Morgan Stanley has received a potentially fatal blow. No American business could withstand the shock it would incur if the government decided it was a better deal to sell its shares rather than hold them. Such a move would effectively be a “no confidence” vote in the marketplace. The government is just trying to help taxpayers, but financial services firms are folding — sound familiar?
- If you went to college, you probably got a grant or student loan from the federal government. If it was a loan, you are paying off that note through regular interest payments to the government. You are also likely paying higher taxes, because you’re making more money that you would have without a college degree. Do you feel like you’re taking the federal government for a ride? Do you owe more control, return and value back to Uncle Sam? No – you’re just a beneficiary of a government program. But that’s what Democrats are arguing when it comes to businesses – that they have “invested” in these businesses, and the businesses owe the government more power or money in return, beyond mere interest payments. College grads would revolt in the streets if they were told where to work by the government merely because they took government loans. Why not the same outrage with America’s businesses?
- The government would be the ultimate conflicted investor. It has a responsibility to the public to enforce the law, but with equity it would have a self-interest in preserving its value in the businesses it “owns.” Do our politics need the furor that would ensue if the government declined to investigate securities fraud allegations, environmental violations, or tax shenanigans for a company in which it had an equity stake? And if the government starts making money “investing” in individual companies, what’s to keep Congress from authorizing future expenditures to aid businesses in exchange for equity? And if those companies have a striking tendency to contribute to the party in power, is this just another opportunity for public corruption and self-dealing? If a government-owned business and its executives refuse to contribute to the President’s reelection, might they face a sudden sell-off of the government’s shares, wrecking its stock price and possibly its solvency? If you think today’s campaign finance system is a shakedown industry, you ain’t seen nothin’ yet.
- If the federal government is given free reign to own American businesses, it has to become the most favored way to quickly enact change in the face of contrary market forces. Need to control greenhouse gases? Buy the coal-burning utilities and shut down the plants. Think Wal-Mart is endangering small businesses? Take an equity stake and turn over the board to “responsible” executives who don’t compete so “unfairly.” This may sound like an efficient way to take care of perceived problems, but it is a profound departure from free markets and a movement toward Soviet-style central economic planning.
- If you still think this is a good idea, ask yourself — if you knew every business in America was susceptible to instant government meddling at this micro-level, would you ever feel comfortable investing in one? Now consider that institutional lenders, venture capitalists, and market-makers would answer the question the same way. Does this sound like a liquid free market capable of supporting your 401(k), money market account, and pension plan?