The political winds have turned against the excesses of institutional strength.
Bailout recipients John Thain and Citibank learned this the hard way. John Thain, the head of Merrill Lynch who negotiated its sale to Bank of America, has been publicly ridiculed for spending days, and over a million dollars, having his office redecorated in late 2007 and early 2008 even as the company he ran was already visibly collapsing. Citibank said yesterday it would go ahead with plans to buy a new $50 million airplane, then backed down when politicians suggested the Wall Street bailout funds were not meant to be used to flee the country at half the speed of sound.
New Treasury Secretary Timothy Geithner is only on his first day on the job, having been confirmed by the Senate yesterday, but he has already taken steps to limit the influence of lobbyists on the Wall Street bailout money. The new lobbying rules came after revelations over the weekend that companies had spent billions of dollars lobbying for bailout money. In effect, it means that a significant part of the bailout money is going to lobbyists.
In economic terms, lobbying can be understood as an investment in institutional strength. The same can be said for the airplane Citibank was considering and the $87,000 area rug Thain is said to have bought with Merrill Lynch’s money. These incidents are emblematic of what has gone wrong with the U.S. economy in recent years. Companies have been spending too much on institutional presence, or power, and not enough on the substance of their businesses.
The reason for investment is supposed to be that it creates productive capacity. Investments are supposed to make it easier for workers to get work done. But when you have a corrupt government that rewards institutional power, it’s only natural that businesses will invest in institutional power — instead of investing in productive capacity.
There are troubling indications that many of these businesses are continuing to invest in institutional strength at a time when productive capacity is desperately needed and when the government is signaling that businesses will have to pull their own weight. Some of the largest businesses want the world to think of them as essential, but they can’t be bothered to get their work done. The result of all this investment in institutional strength, I am afraid, will be a series of “mighty” companies in bankruptcy liquidation, as their executives are subpoenaed to explain what happened.