Senator Warren plans to stifle the influence of big businesses and several CEOs. The Senator is not a fan of Wall Street or large corporations and their CEOs. Many folks agree with her. They see many CEOs collect huge bonuses while their decisions hurt consumers and other stakeholders. To fix these problems, Senator Warren introduced bills in the Senate to do three things: put a wealth tax on individuals; strengthen accountability for CEOs; set the framework to break up large tech firms.
While the status quo is not right, the Senator’s ideas do not show how to stop greedy CEOs from abusing their office while taking huge sums from their firms. Thus, if these bills pass as is, they will reduce risk taking and stifle economic progress.
Let’s look at Warren’s journey to the Senate. She was a law professor for over 30 years; the Leo Gottlieb Professor of Law at Harvard Law School for about 20 years. She advised President Obama and was the key architect of the Consumer Financial Protection Bureau. After the Great Recession in 2008, she chaired the congressional panel of the Troubled Asset Relief Program (TARP). A strong consumer advocate, she is a vocal critic of business and CEOs.
I agree we must protect consumers from abusive companies, but Senator Warren’s ideas won’t fix the targeted problems and might hinder economic growth.
Senator Warren’s Wealth Tax
Senator Warren, who does not identify as a socialist, proposes a two percent wealth tax on Americans with assets above $50 million, rising to three percent on assets more than $1 billion.
Inequality is an issue; but, we do not fix the causes by taxing the wealthy. First, we must identify the systemic problems. We should learn why there isn’t an acceptable sustained rise in lower income levels. In Warren’s proposal we narrow the income gap by taking from the wealthy and later redistributing the funds to lower rungs. How does this approach solve the endemic problem? It doesn’t! It ignores incentives to create jobs and wealth.
Taxing the wealthy doesn’t fix the problem. It will increase tax revenues; but governments will create more programs, hire more people, and be even more creative with wasteful spending. Then again, Warren and her husband earned $905,000 in 2018, which puts them in the top one percent of wage earners. Should they redistribute part of their incomes? No! But Senator Warren’s rhetoric might lead folks to think they should because their incomes are enormous. Warren and her fellow Democrats promote identity politics, exacerbate class warfare, victimhood, and entitlement.
Senator Warren and CEOs Accountability
It’s vital Americans and Canadians find the causes of income inequality and fix them. But solutions must stress wealth creation, it must not redistribute funds from a few folks to the masses. Without a doubt, distributing wealth from the top will deter wealth and job creation. The simple message the Senator is sending to people craving to be the next Bill Gates, Warren Buffett, or Jeff Bezos is: Work hard to develop your firm. Create millions of jobs and expand the economy. Plan to donate most of your wealth to charity; but the government prefers to reshuffle your wealth. Is this the message we wish to send the next generation of business leaders?
One of the two bills Senator Warren introduced is the Corporate Executive Accountability Act
“which holds executives of large corporations criminally responsible when their companies commit crimes, harm large numbers of Americans through civil violations, or repeatedly violate federal law.”
Senator Warren reintroduced the Ending Too Big to Jail Act, a broad bill to hold big bank executives accountable when the banks they lead break the law. In introducing these bills, Warren said:
“Corporations don’t make decisions, people do, but for far too long, CEOs of giant corporations that break the law have been able to walk away, while consumers who are harmed are left picking up the pieces.”…
”These two bills would force executives to responsibly manage their companies, knowing that if they cheat their customers or crash the economy, they could go to jail.”
CEOs Can Be Harmful To Their Companies
I agree with Senator Warren that too many CEOs cause harm to consumers and shareholders and walk away from their firms with large financial benefits. We must hold delinquent CEOs who break the law accountable. But, we must be careful we do not punish CEOs for well-intentioned, bad corporate decisions? That’s the role of the board of directors and shareholders! Still, I realize the interconnectedness of corporate board memberships will allow some CEOs with poor performance records to survive.
Paul Carroll and Chunka Mui in their book Billion Dollar Lessons said:
“We defined failure as writing off major investments, shuttering unprofitable lines of business, or filing for bankruptcy. …The extent of failures was stunning [over 25 years]. …Since 1981 (to 2006), 423 U.S companies with assets of more than $500 million filed for bankruptcy. Their combined assets at the time of their bankruptcy filing was $1.5 trillion; yes, that’s trillion with a “t” …Over those 25 years, 258 publicly traded U.S companies combined for $280 billion in write-offs.”Carroll, Paul, and Chunka Mui, Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years, Penguin, 2010, pages 279-291
Carroll and Mui found that the problem was not negligence or poor execution. It was poor strategy. Should a CEO go to jail for a poor strategy? For ineptness? Some “negligent” acts flow from lack of skills. As written, the bills won’t prevent poor strategy development, instead, it might discourage competent, well-intentioned CEOs from taking needed, measured risks, which are essential in running businesses. Existing laws will take care of dishonest CEOs and send them to jail. It is crucial Democrats and Republicans find a bipartisan way to agree on a bill that addresses the fundamental issues Warren’s bills are trying to solve.
Senator Warren Wants To Break Up Large Tech Companies
Here again, the Senator hasn’t nailed the issue. But she presents a solution. It is naïve and ineffective as it does not fix the problem. Facebook abused people’s data, but but breaking up Facebook will not address the privacy issue. A $10 billion Facebook (Warren’s breakup threshold is $25 billion) firm will misuse personal data. Size isn’t the issue. Consumer vigilance, corporate openness, and simple, pragmatic government oversight is what we need.
I agree with the Senator when she says,
”I want a government that makes sure everybody — even the biggest and most powerful companies in America — plays by the rules, … And I want to make sure that the next generation of great American tech companies can flourish.”
The challenge is to find the right, non bureaucratic, minimum rules’ solutions. Every company should play by the rules!
Only one CEO went to jail following the Great Recession. Should others have gone because of their poor stewardship and ill-advised decisions? CEOs of several companies abuse people’s private information and waste shareholders’ funds; this must stop! However, we delude ourselves if we believe the size of large tech companies that Warren is targeting is the problem. Because of the visibility of these large tech companies, we are better off today with them as is, than if we divided them into smaller firms.
The law must level the playing field, apply wise rules, but not give in to over-regulate firms. Facebook is fishing for more rules, which would help to create a larger entry barrier than today. Regulation as Facebook requests will assure its near monopoly of its industry. Instead, the law should force it and other tech firms to be honest about how they collect, use, and share people’s data.
© 2019 Michel A. Bell