from Renewing America

What Is Wrong With American Business?

October 25, 2013

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Corporate Governance

It was Vladimir Ilyich Lenin,  an astute student of the system he was determined to destroy, who is purported to have said: “The capitalists will sell us the rope by which we will hang them.” After reading the Washington Post story this week on corporate political donations to Republicans, it seems he may have been on to something.

The point of the quote, apocryphal or not, is that business too often suffers from a short-term mentality in which the sale of the rope (bigger profits!) outweighs the longer-term consequences, however grave they might be. It is hard to know how else to explain the bizarre pattern of political giving uncovered by the Post story.

According to the story, a joint effort by the Post and the invaluable Center for Responsive Politics, some of the richest business lobbying groups gave a majority of their Republican donations to lawmakers who voted against lifting the debt ceiling and re-opening the government. Take the American Bankers Association (ABA). From 2009-2012, it gave $2.2 million to Republicans who voted no on the debt ceiling increase, versus $2 million to Republicans who voted in favor. Giving by many other big business groups was nearly as tilted to the 144 House members and 18 senators who voted to default on U.S. debts.

In other words, an association that represents the interests of bankers – whose success depends above all else on financial stability – gave a majority of its GOP donations to members of Congress who were willing to risk a financial conflagration that could have cost ABA member companies billions of dollars in losses. None other than Frank Keating, the ABA president, put it succinctly when asked about the potential consequences of a default: “This is just completely mad, as far as most of the community bank people are concerned, and I’m sure their customers and clients.”

If it’s completely mad, then why are the ABA and many other prominent business associations supporting these members? The reason is that the same Republicans willing to risk a default are also in favor of policies that business believes will reduce expenses and help their bottom line – lower taxes, less government spending and lighter regulation. The short-term gains of supporting these politicians have outweighed the potential longer-term consequences.

The problem is part of a larger one that professors at the Harvard Business School have identified as a failure by American business to protect the “commons” that are vital for its own profitability. Investing in workplace training, nurturing local suppliers, and spending on research are all costly activities, and many companies are loathe to pay the up-front costs on the uncertain promise of future gains. It is easier to search for quick cost savings. But if every company behaves the same way, the United States becomes a less attractive place to invest, to the collective cost of both business and the larger society. A federal government that can be relied on to pay its debts is one of those things that is rather essential to a well-functioning "commons."

The encouraging news is that business may finally be waking up to the consequences of its own short-sightedness. As one Texas fundraiser told Politico: “Why do I want to fuel a fire that’s going to consume us?“ It’s not just the near default, but also the failure of the GOP to deliver on major business priorities such as immigration reform. Donations appear to be dropping for a number of prominent Tea Party Republicans, and big business donors are scouting around for alternative candidates to support.

Surely such candidates exist, those who favor business and but also understand the need for effective and intelligent government. The two are hardly mutually exclusive. Sadly, business has been behaving for too long as if they were.

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Corporate Governance