Populism and the American Economic Crisis: When will Washington Learn to Lead

In his book, Liberalism against Populism, political scientist William H. Riker wrote that “If people speak in meaningless tongues, they cannot utter the law that makes them free.” According to Riker, for the populist, liberty and hence self-control through participation are obtained by embodying the will of the people in the action of officials. Individual liberty is the participation of the citizen in this sovereignty. “Liberty”, according to the populists, is obedience to a law we have prescribed for ourselves,” with a sovereign government operated by elected officials charged with carrying out the will of the people.

But populism can run amok if it is not tempered by knowledge. The recent complaints against American International Group, Inc., provide an example not only of populism gone wild but of how our elected officials continue to fail to lead. If there is a time to further America’s transformation from a consumer driven society to a society driven by the benefits of a free and efficient market, now would be that time. Instead, our elected officials prefer to play to the unsubstantiated fears held by our citizens by continuing to place the producer and investor classes in our society in a negative light. This is the time when Congress especially should be promoting confidence in our markets instead of perpetuating the myth that bankers are all a bunch of Bernie Madoffs in training. Should our Congress and the Obama Administration continue down the path of fanning the populist flame, we indeed run the risk of furthering the very downturn in economic growth that we allegedly are trying to avoid.

There is an inverse relationship between populism and growth specifically in our securities markets and economic growth in general. Populism, more specifically the distrust of our securities markets that populism is engendering, may result in fewer investors in our publicly traded firms. This reduction in capital will drive up the cost of raising capital from other sources such as commercial banks or internal funds. As the cost of obtaining capital rises, business models may have to be scaled back or scrapped altogether. Once this decision is made, the demand for labor may be severely impacted because the need for labor falls when commercial activity declines. As the largest institutional investor in the United States, our federal government seems to fail to understand this basic tenet. In terms of the bonuses paid to AIG, a sophisticated institutional investor would understand that keeping good talent is a cost of doing business and that paying bonuses may lead to higher rates of return resulting from the greater level of productivity incentivized by the bonuses.

Let me be clear that I do not believe that bonuses should be thrown about freely. They should be earned and in the instances where performance metrics have not been met, they should not be paid. On the other hand, we cannot view the payment of bonuses with a consumer mindset. The consumer mindset is driving the populist objection toward the payment of bonuses. Because Congress’ mindset is just as consumerist as most of its constituency, it easy for Congress to get in front of the mob and go seeking the Frankenstein monster’s head. It is this very mindset that led to the speedy passage of the Grayson-Himes Pay for Performance Act, legislation that prohibits any executive or employee from receiving any unreasonable or excessive compensation pursuant to standards set by the Treasury Department.

Consumer mentality, the very mentality that is primarily responsible for our economic morass, is short-sighted and impulsive. The investor mentality is long-term and exhibits a willingness to sacrifice in order to achieve long-term gain. Congress, particularly the House of Representatives, is in this mold. During their two-year terms, House representatives have a year to wreak legislative havoc and one year to campaign and sell voters on the benefits the havoc will allegedly bring them.

Congress can show leadership by acting like an investor. First, it should stop hiding behind the phrase “taxpayer money.” The money Congress has invested into AIG, Bank of America (BAC), and Citigroup (C), is not taxpayer money. It is federal government money. The taxpayer gave up that money every time he paid taxes and is not getting one red cent of it back. Second, Congress should work within the existing laws of corporate governance by not bypassing a company’s board of directors with decisions that directly impact a firm’s personnel. If Congress wants to influence the make up of an executive committee or a board of directors, it should follow the firm’s by-laws as well as the laws of the state in which the firm is chartered. Finally, as an institutional investor, Congress should exercise the very due diligence that any other large investor would exercise before it acquires a firm’s assets or stocks. Contrary to Congressman Alan Grayson (D., Fla.), just because you own a majority of a publicly traded firm, it does not give the shareholder the right to set salary of a firm’s personnel. That’s up to the managers of the firm and the prevailing wage rates set by the labor market.

If Congress is to play any credible and significant role in managing the economy during this downturn, it needs to act like a sophisticated investor, not a mob leader.

* Alton Drew is an independent public policy analyst and adjunct professor of legal studies at Kaplan University. The views expressed in this article are solely those of the author.

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
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