The Aristocracy of Unproductive Zombies

In an in-depth piece on WSJ.com today, writers Bob Davis and Jon Hilsenrath report that Federal Intervention Pits 'Gets' vs. 'Get-Nots' (subscription required). Speaking to a factory worker who stopped into a sporting goods store for a gun case, they informed him that, because of the government bailout money given to Cabela's for its store-issued credit card operations,

The U.S. government helped finance the transaction. Earlier this year, it recharged the credit-card operations of the Nebraska-based retailer of hunting and camping gear with nearly $400 million of federal financing.

Mr. Davis was surprised to hear about the government's helping hand, and hardly pleased. "Anything the federal government, or any government, sticks its nose in fails or makes things worse," he said as he made his way across the parking lot with his son.

This is a common sentiment in large swaths of America. It's difficult to discern if the authors agree, but luckily they make few evaluative comments and instead focus on the disturbing facts:

True or not, what's undeniable is that the federal government has burrowed its way deep into the quotidian workings of American capitalism.

Since the onset of the financial crisis nine months ago, the government has

• become the nation's biggest mortgage lender,
• guaranteed nearly $3 trillion in money-market mutual-fund assets,
• commandeered and restructured two car companies,
• taken equity stakes in nearly 600 banks,
• lent more than $300 billion to blue-chip companies,
• supported the life-insurance industry and
• become a credit source for buyers of cars, tractors and even weapons for hunting.

[converted to a list for emphasis]

When laid out like that, it's truly flabbergasting. What is the effect of this unprecedented interference in the economy on the nature of American business? If you have read Atlas Shrugged, you'll likely be able to answer quickly: the Aristocracy of Pull.

The massive intervention has shifted the way companies do business in a host of ways -- not all of them intended by the government. Increasingly, companies big and small are competing on the basis of their ability to tap government money. A divide is opening between gets and get-nots. ...

Government spending as a share of the economy has climbed to levels not seen since World War II. The geyser of money has turned Washington into an essential destination for more and more businesses. Spending on lobbying is up, as are luxury hotel bookings in the capital. [bold added]

Government intervention has wide-ranging impacts on markets, and on firms that seek and obtain bailouts, those that fail at that task, and with firms who actively avoid government cash. Some even use their defiance and independence as a marketing tool.

Victor Stabio, chief executive of Hallador Petroleum Co., a Colorado coal and oil producer, recently got mail from UMB Financial, a bank in Kansas City, Mo., that advertised it hadn't taken a penny from the Treasury's Troubled Asset Relief Program, or TARP. Mr. Stabio says he was impressed. He moved $8 million of Hallador's money to UMB. "I didn't like the whole TARP program to start with," he says. [bold added]

But when even admirable companies like BB&T feel compelled to take bailout money because money given to competitors puts them at a disadvantage, what happens to the less admirable, less well run companies who seek bailouts?

Some economists and business leaders worry the intervention will result in rules that hamstring the way some businesses operate, and that it will sustain unproductive zombie firms and burden the next generation with debt or inflation. [bold added]

Were the authors thinking of GM when they wrote about "unproductive zombie firms?" That was certainly the first thing to come to my mind. GM and Chrysler were the beneficiaries of lots of government help, while Ford was not because Ford was in a stronger position. It's not hard to predict that the market-distorting impacts of this government takeover of one of the major players in the auto market will have long-term negative effects on their slightly healthier, and non-bailed out competitors. This whole mess could easily destroy the entire market for American-made cars, leaving only a government-run monopoly, inefficiently producing substandard cars that no one wants.

Competitive advantage is no longer obtained by making the best product at the lowest cost, or in having the best marketing or distribution strategy. Advantage is gained by having the most pull, by being the one to be declared "too big to fail." Witness the perversion of the nature of competition in the following example:

The prospect of dipping into buckets of federal money has ignited competitive scrambles in lots of industries. In the farm-equipment sector, Deere & Co.'s purchase of a thrift years ago qualified it in December for a government guarantee on $2 billion of its debt, through a Federal Deposit Insurance Corp. program to help banks access debt markets.

But the FDIC didn't cover competitors such as Caterpillar Inc. or smaller equipment providers. So the Equipment Leasing and Finance Association, a trade group, lobbied the Fed to expand the TALF program to sales of farm equipment and other machinery. The association's president, Kenneth Bentsen, a former Democratic congressman from Texas, met with the Fed's general counsel and followed up with phone calls and letters. The Fed eventually expanded TALF to cover Deere, Caterpillar and other equipment makers. [bold added]

Welcome to the new face of the American competitive spirit, one fawning and obsequious, pleading for privilege. Mr. Rockefeller, meet your replacement: Wesley Mouch, Washington Man.

The other edge of this double-edged sword is increased regulation. Because of the popular, and seemingly impossible to kill, incorrect notion that it was a lack of government regulation that led to the economic crisis -- when in fact it was the exact opposite -- the Obama administration will be calling for new regulation that they swear will not "hamstring the way ... businesses operate."

One of the most important pieces of the federal intervention is the rewriting of financial regulations, which the administration expects to propose this week. Under the plan, firms deemed "systemically important" would be regulated more heavily than other firms, to limit the chance they fail and threaten the broader economy.

Government backing could help banks, hedge funds, private-equity firms and others considered too-big-to-fail firms to gain an advantage by being able to borrow at rates below their smaller competitors. But there's a catch. The government could demand these big firms hold more capital or limit their dependence on debt, discouraging them from gambling with taxpayer backing. That would limit both their risk-taking and their potential profits. [bold added]

"Systematically important"? Is this a newspeakian euphemism for "too big to fail," but with an implied stick (regulation) instead of a carrot (bailouts)? As we have seen from this administration, it is all too eager to use its new found power impose its will on private business. Just ask the ex-CEO of GM, or see the new "executive pay czar."

As the acceleration of the aristocracy of pull (which has sadly been around for some time) fast becomes the aristocracy of unproductive zombies, while the government continues to prop up the GMs of the world, one wonders how bad it will have to get before people wake up to the fact that government interference in markets is the problem. What will it take for Americans to understand that we need a Separation of Economy and State as badly as we do one of church and state?