Criminalizing Excess Profit Margins

Before we spend too much time in the bank-bailout hearings arguing about CEO salary caps and the types of hedge funds to be banned, let's think about root causes, shall we? How about banning any sustained profit margins above some arbitrary cap like 12 percent? Socialism, you say? No more so than nationalizing an insurance giant like AIG. And something tells me even Adam Smith might understand the point. Bear with me.

Before the S&L shell games and leveraged buyouts of the mid-1980s, investors were happy with regular profit margins for goods and services in the 5 to 8 percent range, with occasional surges into double digits when a buying craze hit anything from tulips to Teenage Mutant Ninja Turtles. The important thing was, the surges were related to specific goods and services over which the public at large went temporarily mad.

The common thread in short-sells, derivatives, collateralized debt obligations, hedge funds, vendor-financed Internet infrastructure, commodities speculation, et. al., is that investors seek and expect continuous profits in the 12 to 20 percent range. These kind of expectations killed the media industry. And in the case of financial instruments, they are seeking profits from bets waged on future market behavior, not on tangible goods and services. Excess profits are being conjured out of thin air. Sounds like a RICO violation to me!

Wait a minute, you say, how can excess greed be criminalized? Doesn't that destroy capitalism? Hell, no. Regulating externalities like labor rights and environmental factors not only has a long history, it has been critical to controlling capitalism to prevent it from being self-destructive. China's recent experience with losing control over additives in its food supply shows that early efforts like the Pure Food and Drug Act of 1906 were key to taming the capitalist beast.

When I was out walking the dog at 5 a.m. this morning, I was dreaming up advertising campaigns. Haul some Jenny Craig slim-down pictures out and say, "Wall Street: Slim down your profit footprint!" -- thereby linking the notion of excess profits to the carbon-footprint ideas of the environmental movement. And, of course, use the Monopoly symbols of the angry cop to insist: "Profit margins over 12 percent? Go directly to jail!"

Broken Models, Free Lunches

As we catapult in slo-mo toward what may be the most significant recession in decades, I keep hearing the same analogy being offered in industry after industry regarding broken models of economic transactions betwixt developer and end consumer. In the business in which I work, journalism, the models of revenue generation are so broken, with ad revenues both in print and online predicted to take another steep drop in the next two quarters, that people are beginning to wonder how any news coverage outside of superficial-opinion blogs will be subsidized any more. See Brian Fuller's regular coverage of this in Greeley's Ghost.

The same is true in the electronics industry I write about. Chip developers hear of crises in broadband delivery mechanisms from everyone ranging from the top of the chain (Netflix, YouTube, Facebook) to the carriers, to the communication-equipment manufacturers, yet no one will pay them adequately for developing complex chips to handle high-speed communications. Repeat the model in the music industry, automotive, light industry, medicine -- supply chains are universally ripped asunder, folks, and they are not being cobbled back together.

In the "stakeholder" movement to push for corporate social responsibility, activists often talk of corporations having to plan for "externalities." In other words, environmental regulations, labor issues, human rights issues, are long-term external costs that don't fit into normal quarterly business plans, so companies have to work the externalities in to the way they do business.

Why wouldn't the same be true for individual consumers? We have gotten very used to the idea of free lunches in our lives, particularly since the advent of the Internet. In addition, global systems of energy, communications, and trade have gotten so complex, as Arthur C. Clarke would say, they become "indistinguishable from magic." If you wave a magic wand, you don't have to pay anyone, right?

This same factor works in state and municipal budgets. Pity the Midwestern industrial-belt states, overtaxed but unable to sustain infrastructure any longer. Then look at Western states, where libertarianism is so ingrained, folks don't want to pay for public renovation and park-system and infrastructure projects. The new model may be the mid-Atlantic and Deep South states, where people are willing to pay a little extra to get municipal redevelopment that actually works.

This might be the way to look at repairing broken supply chains in the private sector, at least as far as the end consumer is concerned, by repeating the mantra "No one rides for free, folks." We need to make explicit all the hidden costs of running shows, from maintaining a broadband Internet to making sure our bridges are in adequate states of repair. Sometimes that means paying higher bills with explicit (and well-explained) charges for externalities people take for granted. Sometimes that means (gasp) higher taxes. How do we convince people that they've been feeding off too many free-lunch troughs and that higher taxes might be good for them? Hell if I know. I just know I've lost my libertarian friends.