Has Government Crossed the Line?


From bank bailouts to auto bailouts to executive pay, business is increasingly nervous about the heavy hand of the Obama Administration

It remains an open question whether the much-heralded "green shoots" truly signal a turn toward a U.S. economic recovery. What's clearer is that the business backlash against government is well under way.

Not so long ago, business and policymakers alike were calling for Uncle Sam to step in and stop the bleeding—in the financial sector, at the automakers, in the housing and job markets. Most of the sniping that occurred came as various government figures criticized one another for doing too little. Now, however, the grousing is shifting to arguments that the government is overstepping that subjective line between helpful intervention and harmful meddling, including in areas where business only recently welcomed Uncle Sam's dollars.

"They're making business decisions in a way that is political," John A. Allison IV, chairman of BB&T Bank (BBT), told BusinessWeek at a Beltway gala on June 11. BB&T was cleared this past week to return $3.1 billion in federal bailout money. "Where does it stop? The people making the decisions don't have the knowledge of the industries, of the institutions, to make good business decisions."

Go-Go Government Intervention

Certainly, last week brought plenty of revelations about the government's role as an activist investor, both now and at the height of the crisis. The Treasury unveiled broad principles for executive compensation and backed legislation to give the Securities & Exchange Commission and shareholders more say in how compensation policy is shaped; it also appointed a "pay czar" to police compensation at the seven companies that have received repeated federal aid.

The Food & Drug Administration got the go-ahead to regulate tobacco as a drug. The Supreme Court stood aside, letting the Obama Administration's plan for Fiat (FIA.MI) to acquire Chrysler go through, despite arguments by some creditors that it stood on end the usual bankruptcy process. And the Administration's role became clearer in everything from picking board members and top executives to "changing the culture" of also-bankrupt General Motors.

On Capitol Hill, indignant lawmakers listened as Bank of America (BAC) CEO Kenneth Lewis described the pressure he felt late last year at the hands of Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson to go consummate the acquisition of an ever-shakier Merrill Lynch.

"Campaign for Free Enterprise"

So perhaps it should come as no surprise that the U.S. Chamber of Commerce—perhaps the business lobby's most persistent voice against government regulation—picked this week to launch its "Campaign for Free Enterprise." Declaring that "capitalism is at a crossroads," Chamber officials called the effort to "defend and advance America's free enterprise values in the face of rapid government growth and attacks by anti-business activists…one of the most important and necessary initiatives in [the Chamber's] nearly 100-year history." Two days later, the Chamber sent an open letter to Senator John Thune (R-S.D.) supporting a "transparent exit strategy to ensure the timely withdrawal of the federal government from these most extreme and unusual forms of intervention."

The Republican Party of Florida put it a little more bluntly, headlining its criticism of the Obama Administration's forays into business (and some other issues) "Back in the USSR" and decrying that the Administration has more czars—over health care, autos, executive pay, and more—than did three centuries of Romanov rule. (Never mind that some of the U.S. czars date to GOP Administrations or that the Romanovs and the Union of Soviet Socialist Republics didn't exactly overlap.)

The Administration's approach has real dangers. Attempting to reorganize and tinker with the culture of a giant corporation like GM is risky in the best of times. Taxpayers may find themselves hopelessly entangled in lost corporate causes, with billions of loans never returned. Companies that are shackled with pay restrictions may lose top talent to those that aren't. Countless historical examples show the potential for unintended consequences from well-intended policies. (Just one example: the costly distortions in employee titles and pursuit of tax loopholes that followed imposition of government wage and price controls.)

Business Used to Want Federal Assistance

Of course, business was happy to get federal funds when they were being doled out by the fistful over the past eight months. The Chamber, for example, lauded Congress for the original $700 billion financial-system bailout; pushed for aid to the automakers; sought borrowing assistance for the nuclear, coal, and other industries; and called for stimulus spending and subsidies for transportation, broadband, housing, auto sales, and small business, as well as exporters.

And while Florida state GOP chief Jim Greer criticized the stimulus bill as laden with pork-barrel spending while it was being hammered out, he also made sure to praise its "important funding for certain essential services" and pushed to "ensure that Florida receives its full share and is able to use any federal economic stimulus dollars coming to our state."

Some lawmakers, too, are now calling for the government to back off where they once demanded more involvement. As The Washington Post's Steve Pearlstein points out, for example, Senator Bob Corker (R-Tenn.) criticized last fall's plan to aid automakers because it didn't demand enough from the companies in the way of restructuring. But more recently, Corker is pushing legislation to force the auto companies to reimburse dealers whom they want to restructure out of existence.

Time for a Backlash

Regardless of where you stand on the political spectrum, you could view this shift as a good sign, a return to something approaching normalcy. With a full-blown crisis raging, after all, it's politically awkward to stand in the way entirely, says Julian E. Zelizer, a political historian with Princeton University's Woodrow Wilson School of Public Affairs. "When everyone's losing their savings, it's hard for business to say the government shouldn't do anything," he says. "Now, there's some sense of calm for business to be more critical again."

Similarly, the President's political opponents have an easier time making hay out of what is, after all, a core issue to the GOP. Especially with cultural issues like gay marriage and abortion apparently lacking the traction they once had, "this is an issue Republicans have been able to do well with in the past," Zelizer says.

At the same time, the increasingly vocal backlash also illustrates a classic corporate dynamic—albeit with some unusual twists—says Heather Elms, an American University associate professor of international business. Ordinarily, she notes, corporate management is paid to use its discretion in balancing the interests of various stakeholders—shareholders, bondholders, employees, and government, among others. "To some extent, the crises at these companies are evidence that they weren't doing a very good job, so you have all these stakeholders stepping in and saying no, this is how you do it," Elms says. "Now the government is saying we want some strings attached to that, and the managers are saying we don't want you to mess around with our discretion."

Government Is Different

Of course, the government isn't like other stakeholders. While shareholders, employees, and customers can only vote with their feet, the government can force many of the changes it wants, as it did by statute when it came to limiting pay at banks taking federal aid, and with its deep pockets at the automakers, who might not have found bankruptcy financing elsewhere. Moreover, markets are flexible and can adjust fairly quickly, but statutes tend to linger.

"There's an inevitability that things aren't going to work out exactly the way they were intended," Elms adds. "People tend to ascribe great powers of thought and reasoning to executives and politicians, but they're exploring here, they're experimenting, and none of them knows exactly what to do."


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