Come Fly The Friendly Government
Posted by Paul Musgrave on 12 May 2005 | 24 responses
The New York Times reports that United Airlines will be allowed to offload its pensions burden on the federal Pension Benefit Guaranty Corporation. The PBGC will assume most of United’s $9.8bn pensions liability. There are few better examples of moral hazard at the moment, as George Will saw the clouds on the horizon (Will probably reads the business section of his paper; the Journal and others have been talking about this for months now) and explains what the increased competition of the globalized world means for the welfare state and the ethos of capitalism.
24 Responses to “Come Fly The Friendly Government”
As I understand it, the average UA retiree is losing about half their pension benefit because of this, while the UA CEO keeps his full $3-million-plus pension. Because, you know, he’s doing such a great job. Capitalism rewards excellence …
This certainly is a warm and fuzzy reminder of how great private retirement plans are, and why we should get rid of that silly social security program.
The fun part is that if United’s default on its pension obligations causes its creditor-employees to default on obligations to their own creditors, those employees will be subject to the new draconian bankruptcy law recently passed.
Not all debtors are treated equally.
I like Will’s description of the problems entailed by globalization and increasing competition. But he punts on any solution, effectively saying, at the end of his piece, “the failure of private pension plans will make Social Security reform harder to sell, but we should do it anyway.” Maybe he has explained why he thinks this is the case in other op-eds, but I’m left a bit bewildered.
Yes, but the real news is that Amtrak is unviable because it only loses less than a billion a year while maintaining an ontime record equal to that of the airlines as a whole.
The real answer is to privatize Amtrak, just like the airlines, so that we can really start to see some meaningful free-market drains on the public purse.
Seriously, does anyone else notice the cognitive dissonance involved in focusing obsessively on passenger rail’s paltry subsididy while totally ignoring the massive taxpayer subsidies going to passenger air travel? Why is there a demand that one (rail) be subject to market forces while another (air) be totally insulated from them?
greg
Greg,
Why should the government heavily invest in rail when over-the-road coach operators have to pay fuel tax, licensing taxes, etc.? It’s kind of hard for them to compete with the gov’t.
And to Aaron’s sarcastic comment indicating his desire to keep Soc. Security as is: Don’t you realize that if the workers had been given Private 401K accounts, they’d have been 100 percent vested, and United would be unable to touch it? Don’t you realize that S.S. is basically the same thing as the so-awesome pension United Airlines workers had? Wouldn’t it be nicer to have a private account that the government wouldn’t be able to reduce?
Just thinking…can you think of any other companies lately that had defined contribution style 401k plans where people have ended up in even worse situations than the workers @ United? Several come to mind for me immediately. (probably Enron and Worldcom most notoriously)
Enron employees and Worldcom did not have to put all their eggs into the one basket. They did and they were fools for so doing. Waste no tears on them. Unremarked upon is the “moral hazard” in the United case. Greedy unions can and do press weak and timid “management” into foolishness knowing all the while that Uncle Stupid stands ready to bail them out. This was true at Studebaker-the original poster child for government assuming private liabilities, stepping in only to step in it.
Oh, and by the by, United might be suffering from sporatic strikes over the summer travel season. The flight attendant’s union voted an overwhelming 97% in favor for the upcoming strike.
And one further thing… United is declaring the strike “illegal under bankruptcy laws” and is moving to squash it in court…
Just flying the friendly skies, huh.
Sheesh, Anon, that snorkel seems to have filled with CO2, come up for some fresh air, why doncha?
In Anon World, it’s all the employees’ fault:
“Enron employees and Worldcom did not have to put all their eggs into the one basket. They did and they were fools for so doing. Waste no tears on them.”
Wait, no, it’s all the liberal unions’ fault:
“Greedy unions can and do press weak and timid “management” into foolishness knowing all the while that Uncle Stupid stands ready to bail them out.”
Anon clearly goes for that personal responsibility stuff only when it’s the little people retirees at Worldcom and Enron and UAL needing to be responsible, but not when it’s Big Business and management. Otherwise, Anon would see the exact link between these two instances: In the one case, the little people made a bad choice? Screw ‘em! In the other, management made a bad choice? Screw the union!
Most excellent fraudulent thinking there, Anon.
“Enron employees and Worldcom did not have to put all their eggs into the one basket. They did and they were fools for so doing. Waste no tears on them.”
You, just illustrated why privatization will never work. Because the vast majority of the public are in fact “fools” — but hopefully not foolish enough to give up social security, the one safe place for “fools” to place their retirement savings.
Investment is extraordinarily difficult. The game of investing is not a place where ordinary people often succeed. Experienced investors, razor-sharp teeth flashing, will always say “come on in! Make lots of money!” when a “fool” warily peers into the market. But the fact is they will eviscerate said “fool” and then tell us to “shed no tears” for him.
So stop feeding us this crap about how private investing is a good idea. You just want us to do it so you can disembowel our retirement accounts and leave us “fools” with nothing.
Given that (as Will has written elsewhere) the employees of UAL and GM et al were guaranteed the defined-benefit pensions as part of their compensation package (a bargain that, in the Seventies for instance, looked like a no-brainer), I tend to think that, yes, it is in large part the fault of the government for offering this moral hazard; it is also partly the fault of UAL et al for failing to adapt to a changing environment; and it turned out to be a bad “bet” (which it implicitly was) for the employees to believe that UAL et al were credible in their offer. (The role that the employees have played in directly limiting the ability of legacy airlines and domestic automakers to adjust to internationalized competition, however, deserves serious mention.)
Perhaps it’s time to pierce the corporate veil and get at the assets of shareholders and management. I believe Republicans are on record as being proponents of “personal responsibility,” so they shouldn’t mind getting rid of the corporate shield which places significant limits on personal responsibility.
“Perhaps it’s time to pierce the corporate veil and get at the assets of shareholders and management.”
Stop thinking like a lawyer and start thinking like an economist. What would the effect on the market be if this were actually attempted?! (Sarbanes-Oxley already has put the fear of God into corporate board members.)
Do concerns incorporated in other western democracies have the same level of protection as the US ones do, Paul? Because, unless you can answer that in the affirmative, and I don’t think you can, then your “effect on the market” quip is hot air, assuming any foreign companies are currently successful despite the “effect on the market.”
Nash, that’s an apples-to-oranges comparison as you well know. The corporate structure of firms in, say, Germany is so different as to make board-to-board comparisons with the U.S. difficult in the extreme. The importance of unions in Deutschland is only the most notable difference; as the Economist notes: In Germany, for instance, companies are obliged by law to have a two-tier board: a management board takes responsibility for the day-to-day running of the company and a supervisory board, comprising representatives of shareholders and workers, has strategic oversight. Members of the management board are jointly responsible for running the company.In another article, the mag examines the power of shareholders (the owners of firms, recall) in Europe and finds that their interests are often crowded out by management because of one-owner, one vote rules. In other words, a German AG is very different from an American or an English Inc. Similar analyses hold for other countries. (And we shouldn’t forget that in many other countries, of course, large concerns are more likely to be owned or part-owned by government with much tighter regulatory control.) In sum, I reject your premise.
In any event, given that Sarbanes-Oxley already makes board members liable for false financial statements, that corporate governance reform has barely begun to take hold, and that (over the long run at least) markets generally punish bad management one way or another (see, e.g., GM’s bond ratings and its performance in the bond markets), how exactly is Doug’s solution going to help anyone?
I agree–Doug’s solution isn’t one, because it doesn’t help anyone, but your dire prediction about “the market” remains pointless as well.
And your love affair with Sarbanes-Oxley appears to be unrequited, as big business is busily lobbying Mr. Cheney about how terrible its effects are and will be–one of those “think of the markets!” ploys again.
I wasn’t really all that serious about piercing the corporate veil as a solution. I was more using it as a rhetorical device. I’m actually less interested in piercing the corporate veil and more interested in getting Republicans to shut up about personal responsibility while the big corporate elephant sitting in the corner. (I would, however, like to dispose of the legal fiction that corporations are “persons”.)
>>Stop thinking like a lawyer and start thinking like an economist.
One thing I agree with the free-market folks on is that Sarbanes-Oxley, as well as earlier attempts to make the market safe for individual investors, are a waste of time.
The whole point of these regulations is to pretend that public companies are something other than what they really are: a scheme to strip ownership of risk and accountability, and sell off that risk and accountability pinned to nothing but an unenforceable promise of ownership.
Shareholders control nothing in a corporation, and bear all the risk of a corporation failing. All the “corporate governance” reform, and all the manditory disclosure filings in the world can’t change that glaring fact. The true owners (the controllers) of a corporation risk nothing; even if the company goes bankrupt, they walk away with millions, unaccountable for the financial tragedy they leave in their wake.
This scam has been going on for nearly a century, but it may not be able to continue for much longer. The public won’t accept the model anymore as-is, after being burned over and over, so we have to keep layering on protections to create the illusion that it’s not the same scam we all know it to be.
Just stop it. Get rid of all the regulations, force individual investors to admit that they will be chewed up and spit out if they attempt to buy stock. And most of them will decide (intelligently) that it’s not worth it. Nobody should want that kind of “ownership.” Stop trying to convince them they should.
Aaron,
You posted an offensive comment to another thread under the name “Pimp”, 20 minutes after you posted the above. This is not acceptable behavior for someone who wants to be a member in good standing of our little intellectual circle. This is your first and last warning.
Eric, since I was speaking directly to you, and since you generally think I’m just a troll, I estimated the odds of you actually reading what I wrote as higher if I posted anonymously.
I posted a further explanation on the thread in question.
Um, there goes the Cheerleader in Chief’s (ie Shrub’s) Social security tax cut. The reason should be obvious to anyone.
If you don’t like the moral hazard argument from historical examples pay then, close attention to General Motors. There is a weak and timid management and a grasping unprincipled trade union. All this babble about piercing veils? Whose pension plans own common stocks? Whose 401-K’s, whose IRA’s? Get a grip.
I note that George Will now has a column up on this same subject. The end result of government intereference and “regulation” winds up being cost piled upon cost. The airline dominoes are all set to stick it to the taxpayers-the sort of subsidy to very big business and very powerful trade unions that amount to corruption with a Capital C. How did we ever manage without the PBGC and Washington Regulation?
Ans. We managed very well and a lot more effectively than the current mess, expensive mess.