Tuesday, February 8, 2011

Obama Doesn't Understand Capitalism

Obama: Corporate Profits "Have To Be Shared By American Workers" -- February 6, 2011

"If we're fighting to reform the tax code and increase exports, the benefits cannot just translate into greater profits and bonuses for those at the top. They have to be shared by American workers, who need to know that opening markets will lift their standard of living as well as your bottom line," President Obama told the Chamber of Commerce on Monday morning.

The Obama quote is an example of how the President doesn’t understand the difference between shareholders and stakeholders. In Capitalism, profits are to be distributed to the owners of the Company (unless the Company can generate a higher return on its cash), so that they, in turn, can invest and risk that profit on starting or growing other ventures. That is how new jobs are really created.

If a Company has a problem of disparity between the pay of its executives and its workers, it should (at least theoretically) be a disadvantage to be exploited by competitors and damaged by fleeing workers. A Company's Board of Directors is the corporate body tasked with reigning in compensation packages when those packages negatively affect the Company’s performance. A weak Board that doesn't address this problem has historically translated into poor stock performance.

Another example of the President’s misunderstanding concerning why and how capital is risked can be found in the bailout of GM where secured bondholders were crammed down in favor of union workers. Team Obama may think that the GM bailout is a big win -- and in the short-term, it is. But longer term, that precedent will make capital-riskers less likely to provide securitized funding for the next basket case company and taxpayers will be more likely on the hook for turn-around funding in the future.

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