Panhandling in Washington: Gov. Strickland & Co. hit us up for $1 trillion

The amount of money being panhandled in the halls of Congress by Gov. Strickland & Co. is an alcoholic’s plea: enough for a sandwich, or a dollar, or whatever you can spare. Like the change tossed to the drunkard, the nation’s treasure will be wasted on the governors’ unreformed habits.

Governor Strickland joined other governors Friday in requesting a $1 trillion bailout for state governments from the federal government. A month ago, the governors were demanding a mere $134 billion for the states. You will have noticed how the economy became eight times worse in the past 30 days.

This increased demand came in spite of Ohio’s auto industry getting federal bailout money.

The governors of the several states have no more clue how they will right their ships than did the CEOs of the Detroit Three, who had a similarly elastic calculation of the size of their critical need. The D-3 must-have amount was $25 billion in November, then became $34 billion in December, until the Republicans in Congress finally said no -- and President Bush said yes to about $18 billion, just before Christmas. Apparently, that was just enough after all.

The governors have another thing in common with the bankruptcy-proof automakers: None of them seems to have a plan on what to do when the federal cash runs out. Give them money, and they will ask again – just like that alcoholic on the street.

Gov. Strickland recently exempted Medicaid from his planning for spending cuts. But Medicaid is 40% of the state budget. How, exactly, is this going to work?

The Governor's answer is to ignore the Medicaid monster and ask the federal government to pay the bill for business as usual.

David Walker, a former Comptroller of the United States, estimates our total debt and unfunded obligations, such as Social Security, at $56 trillion. That’s almost a half a million dollars for every household in the United States.

The Governors of Texas and South Carolina are not joining Gov. Strickland in the panhandling line, and write about their reasons in the Wall Street Journal. Both of them are Republicans, and represent the backbone of their party – and the future of America.

Mortgaging our future for.... what?

General Motors is pleading with Congress for a bailout – that is, they want money from you and me, $50 billion worth. It’s time to call your lobbyist – he goes by the name “Congressman” – and say we’re out of cash, too.

Not-nimble General Motors is in trouble mainly because 1). It’s building too many gas guzzlers nobody will buy now; and 2). Its costs are out of line.

These problems are merely worsened, not caused, by the poor economy.

The economic meltdown is a recent phenomenon, but GM’s woes have been going on for years. Three years ago, billionaire investor Kirk Kerkorian told GM to slash its pay schedule, particularly at the executive levels, and sell off its Hummer brand, which makes trucks that go through gasoline “like nothing else.”

GM didn’t, and now finds the value of the brand so low that it may not be worth selling. (Don’t get me wrong – if you want to drive a Hummer, and can afford the gas, more power to you. It's just that GM's bad bets on a perpetual market demand do not a national crisis make.)

And GM costs need pruned. For example, American auto manufacturers have more dealerships than Japanese companies – dealerships that cost money in extra delivery charges, advertising and support. A year ago, the Detroit Free Press reported those extra dealerships cost American manufacturers $436 per car.

GM is big, but it’s just one of 17,000 companies that more or less make up “big business” – companies employing more than 500 people.

Small businesses create 75% of all new jobs, and more than half the workers in this country work for small businesses. If GM does seek bankruptcy protection – instead of a bailout -- it will open up new avenues for it to become more like a modern business, and allow it to restructure some of its costs.

At the end of the day, we cannot borrow our way to prosperity. This economic crisis is going to hurt, and America cannot soften the blow for every large corporation facing liquidity problems.

The automotive industry is different than the banking industry, where every business has to go for capital. The automotive industry is huge, but not systemic. And this is a good place to draw the line and say “no.”

Gold-plated CEOs and the free market

Are you mad about corporate executives that become private-jet wealthy while running their companies into the ground? The Republicans say we should just let the free market work, and the Democrats want to set salaries for private companies.

Neither one of those ideas seems right. But if we think it through, there's another way to approach it that will keep us from indigestion over the morning financial pages.

There are two kinds of CEOs: the sort who risk their own money and, by dint of their imagination and hard work build an empire and become fabulously wealthy. They earn whatever they earn, and the government should have nothing to say about it. Think Bill Gates or the late John H. McConnell.

That’s the free market, and it’s not somehow immoral that somebody got rich.

Then, there are those who run companies with other people’s money. And their outsized salaries are not a function of a free market. Here’s a conservative idea: let’s subject those pay packages to the free market.

First, a bit of background.

CEO salaries are generally set by “compensation committees” – people very much like the CEOs they oversee. They use consultants to figure out what other CEOs are making. Then, they sweeten the deal a little, to keep their guy on board. The compensation committee reports to the board of directors, which generally rubber-stamps the recommendation.

Those compensation committees protect CEO salaries from market forces, because they assume what all the other compensation committees decided to pay is the value of a CEO.

But the value of a CEO to a company is not what everybody else pays, but what that particular CEO produces for the company – at its simplest, did the company make any money?

In the compensation committee system, it doesn’t matter. You can run your company into the ground and become fabulously wealthy.

So, here’s the idea: Unless you have a serious investment at risk in your company, top executive compensation must be approved by a simple majority vote of the shareholders at the annual meeting.

If the CEO is making the shareholders wealthy, they will gladly pay her whatever is asked. But, because shareholder meetings are expensive and infrequent, the board will not be willing to take an outrageous pay package to the shareholders for a CEO who is bleeding cash.

That’s not the heavy hand of the government “regulating” private enterprise. It’s setting a fair rule to prevent those with the most power from abusing it for private gain.

Don't let the players make the rules -- and don't let the rulemakers play the game

What do we mean by “regulation” when the government does it to the economy?
The pundits calling for lots more of it are not thinking it through.

The ultimate free market is the guy with a big gun demanding your wallet. But we have rules about that sort of thing – and that’s the point. That’s not the way we want our society or economy to run. Neither you nor the market is truly free in anarchy -- you're ruled by fear.

So, over time, a consensus developed about the rules we should have in a free market: first, rules about contracts. Then, some rules about commercial paper. Eventually, we developed rules to ensure solvency and transparency.

But not all rules are good, and Reagan wasn’t wrong. The government can easily handcuff enterprise and destroy prosperity. We did exactly that from about 1965-1980. We are in danger of doing it again in the reaction to our economic meltdown.

Let’s think about the economy like a football game. We all want some rules: clipping, facemasking, roughing the passer/kicker – these are good rules, and we want fair, tough officials who are going to call a fair game. Nobody wants to play the game when there's a good chance that it involves a wheelchair at the end.

We don’t want the coach or QB to have to get permission to run a play, or to get advance approval from the refs for their game plan. Those would be bad rules – and no one would want to watch the game, or be in it.

So – to stretch our metaphor to the breaking point – these credit default swaps and derivatives and such are like inventing the forward pass. The rules of the game need to adapt to this new idea and the new dangers it may pose. But setting rules about eligible receivers and pass interference doesn't mean the officials should now run the game.

The refs don’t know the game better than the coaches -- and the government isn’t wiser than the people who put their own money at risk. The lesson of the current crises is not that Reaganism is dead, or that free markets don’t work.

The lesson is that you can’t let the players make the rules, and you can’t let rule makers play the game.