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by thereisnospoon Mon Feb 07, 2011
President Obama's speech to the Chamber of Commerce today has been the subject of much praise and criticism. It deserves both, for in fact the critics and the enthusiasts are both right.
It's an extraordinarily well-crafted speech, from a rhetorical point of view. It makes a strong defense of progressive ideas; it shames the Right with their history of moral evil and factual inaccuracy; and it gently but strongly encourages business leaders to try to do the right thing. In that sense, the speech is a home run.
But the one blind spot in the speech is the one that plagues the entire Administration in its approach on everything from healthcare reform to recession abatement: a fundamental misunderstanding of economic incentives in the corporate world.
Obama's approach in the address was to request that business leaders do more to hire American workers rather than outsource jobs abroad; do more to stimulate the broader economy than their own bottom lines, and to ask not what America can do for them, but what they can do for America.
Sounds fair enough. But the President's speech, while intending to be conciliatory to business leaders, is actually incredibly insulting to them. In fact, a CEO of a major corporation with an ounce of intelligence would be more insulted by Obama's speech than by any Ed Schultz rant.
Without realizing it, the President essentially told every member of the Chamber that they've been bad little boys and girls, who put their own selfish interests ahead of those of the nation at large. He tried to shame them, like a good parent would, into more altruistic behavior.
It would be nice to think that business leaders have all just had a moral lapse for the last 30 odd years. But that's not the truth. The truth is that any CEO who behaved morally in the ways Obama is asking would be in violation of the corporate charter, which demands maximum profit to the shareholder. Corporations, by definition, exist to maximize shareholder return. End of story.
So let's engage in a thought experiment. Let's say that by chance, every major corporation in America were suddenly governed by high-minded altruists serving as CEO and Board of Directors. Let's say that they did, each and every one of them, exactly as their President asked of them: they hired American workers rather than outsourced the labor overseas; ensured a fair and living wage for every employee; maintained the highest standards of safety in the workplace; made decisions for long-term stability rather than short-term profit; and did their best not to externalize their real costs onto the American public. What would happen to those patriotic CEOs and Directors?
The answer is that they would get sued or forced out by their shareholders. And rightly so, because they would be violating their charters and failing to do their jobs.
That is why big business and government will always necessarily be at odds with one another, if the system is functioning properly. The key is balance: too much regulation and too much equality of outcome begets economic stagnation due to barriers to growth and lack of competitive incentive. But too little regulation leads to massive exploitation, income inequality, loss of the middle class and destruction of social cohesion, which also begets economic stagnation and lack of incentive to uphold the common good.
There is no such thing as an economic utopia. The perfect economy, insofar as it ever can exist, lies in striking the perfect balance between the necessarily hostile forces of rapacious corporate profiteering, and burdensome government regulation. Both are necessary evils.
Obama's speech, sadly, fails to demonstrate an understanding of that fundamental principle. This isn't about whether our corporate titans are behaving as good or evil moral actors. It's about whether they're incentivized to do the right thing or not.
The incentives and demands of the corporate charter are clear: maximize value to the shareholder. Asking nicely of even the most beneficent and moral of the corporate titans that they explicitly violate that charter is worse than useless: it's an insult to their characters.
Only hostile regulation--regulation expressly opposed to the principle of shareholder return, and thus inimical to the individuals whose job it is to maximize that return--can do what is necessary to achieve the closest thing to economic utopia that we imperfect creatures will ever hope to attain.
