Do Corporations Need Conscience or Freedom?

If you want employees to prosper, don't heap burdensome regulations on employers

'POPULISM" in America has been a force for liberty or tyranny, depending on the circumstances. Today, thanks to a de facto alliance among left-wing populists, right-wing populists, and the media, it's become little more than a slogan with which to bash business. If this keeps up, we may end up with new legislation that further erodes free enterprise.

The fable is familiar enough. Plutocrats are loose on the land, denying their workers lifetime jobs, high wages, and generous benefits. Greedy businesspeople feed like vampires on the suffering of others, arbitrarily tossing employees out the door, wrecking their families.

The media, dominated by reporters hopelessly ignorant of economics, continue to repeat this theme. Newsweek even ran mug shots of the chief executive officers of 13 companies, identifying them as "corporate butchers," in Pat Buchanan's words, as if the management of Digital Equipment, Sears, and Scott Paper (not the political class) were causing living standards to decline. In the Buchananite version, there's also a trade angle. Corporations are accused of opening up plants in foreign countries, which somehow "ship" jobs overseas. So he wants to tax imports, force foreigners to buy more US products, and start trade wars with Japan, China, Mexico, and Latin America.

Democrats in the Senate are touting their own plan. It would increase taxes on corporate salaries and stock options if executives lay off workers. It would also tax companies that do not adopt Washington's approved "code of conduct." Sen. Ted Kennedy (D) of Massachusetts, who praises Mr. Buchanan for sending a "powerful message," thinks we should socialize worker benefits, including health care, so people won't lose them when laid off. He also wants restrictions on mergers and takeovers that result in layoffs.

How can Washington know better than the private sector how many employees each firm needs? In government, the worth of a manager is determined by his or her number of employees. This is not a model for the private sector.

But if the goal is the socialization of the labor force, and the near-nationalization of big business, these are all Fabian-style steps to that end. And if they go into effect, we can expect further declines in our living standard, higher prices for goods, and more unemployment.

It's during anticapitalist frenzies like today's that economists begin to yank out what's left of their hair. It's difficult to sort out the fallacies inherent in all this, but it's worth a try.

What has caused the decline in the standard of living? Not corporate greed. As every businessperson knows, wages, salaries, and working conditions are matters of contract between the employer and employee. Wages are determined by the interplay between the supply and demand for labor, the productivity of the employee, and the capital available.

Theoretically, every businessperson would like to pay employees zero wages. Theoretically, every employee would like a million bucks a day. It doesn't matter how greedy or benevolent anyone is; the compromise between these two positions is determined by economic conditions that have nothing to do with ethics as such.

Now, it's true that this system doesn't work as it used to, but that's not the fault of the free market. Government mandates, taxes, and regulations have vastly increased the costs of labor and the risks associated with new hiring. Every benefit offered to employees (i.e., health care and parental leave) comes right out of the wages and salaries of the workers.

Today, if productivity dips below the prevailing wage plus benefits, the companies must either resort to layoffs or risk declining stock values (40 percent of American families have a stake in the stock market) or loss of profits. Profits are indicators of economic growth, and falling profits are the market's way of telling managers they must change operations or face further layoffs or even bankruptcy.

Neither are layoffs a problem as such, so long as other companies can bid for the newly laid-off workers. Companies are always anxious for these workers' experience and productivity. But the government has intervened here as well. Mandated benefits, payroll taxes, and the risks of civil rights suits cause companies to be as cautious about mass hirings as they are dependent on mass firings. That explains the boom in the temporary-employment industry, which relieves firms of the risks of full-time hiring.

Legislation proposed by Senate Democrats will make a bad situation worse. Taxing corporate managers will mean that the most competent to handle these delicate issues of profits and layoffs will find, on the margin, other things to do. Socialized health will add to the costs of hiring. The attempt by Washington to award roses to good companies and raspberries to bad ones will work just as well as any other attempt to plan the economy.

Buchanan's trade restrictionism would also spell trouble. The economy is not some global pie that can be seized by patriots anxious to get a bigger piece for themselves and their co-nationalists. It's a vast international web of exchange involving billions of small decisions; tampering with it would spell disaster.

Politicians have long fooled themselves into thinking that they can help workers by poking a stick in the eye of their employers, or by protecting industry from competition. Such strategies may help some in the short term, but only at the long-term expense of all the people.

We all have an interest in keeping the relations among employers, employees, and consumers as peaceful as possible. That requires support for the free market and the international division of labor. Those who want to give government even more power are doing the people no favors, whether they call themselves populists or not.