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How to stop corporate bailouts forever

December 12, 2018

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I joined the workforce around July 2008. I was looking forward to earning money. My pay was going to be in the thousands. I was excited to wear dress shirts and pants and walk around downtown looking important. It was a big change from my university days. Then the recession happened.

I wasn’t knowledgeable enough to understand it at the time. I know some people struggled to find work. My dad lost his job. It would take him another 8 months to find another. I, on the other hand, being a phenomenal performer, was spared (thankfully).

I do remember the protests on wall street and all the TV coverage they got. They called themselves the 99%. I must have been one of them.

We were angry about the bailouts. The bankers were saved from bankruptcy despite being responsible for the crash — and our money was used to save them!

It certainly seemed unfair to me.

But what could we do? Letting these companies fail would mean the loss of thousands of additional jobs. “It would cripple the economy”.

We also set a certain expectation. The corporations now understood: once you got large enough, the tax payer will bail you out. We even coined the term “too big to fail”.

Last week, my friend Ivan and I were discussing this exact topic. What could we do about it? And how could we have avoided this? This time however, being more mature and sophisticated, I’ve had the clarity to voice an alternative opinion. I thought it would be good to share it here with you, dear audience.

Ask yourself, what does GEICO do to insure your claim? They charge a premium of course. You pay a monthly fee for the insurance that someone will cover you in case of a loss. Naturally, you cover for large losses that would hurt you financially.

You might see where I’m going with this.

We can determine which companies are “too big to fail”; we can use an income or employee count threshold or another metric (or a combination). Once a company crosses that income level (or employee count), each additional dollar earned would be subject to double the tax rate.

Before all my libertarian friends lose their shit, let me explain.

You can view the additional tax as a premium paid into a bailout fund. In case of gross mismanagement and undue risk, the responsibility of bailing out these large corporation doesn’t fall on the tax payer but on the companies themselves.

In reality, no prudent corporation would be willing to pay more tax than necessary. Instead, as the corporation approaches this limit, they will likely split into sub-units.

Amazon would become Amazon AWS and Amazon Retail; Microsoft would become Microsoft Office and Microsoft Windows, Walmart would become Walmart East and Walmart West. You get the idea.

I’d be lying if I told you I came up with this idea myself. This is taken from Nassim Nicholas Taleb and his excellent book “The Black Swan” (no relation to the movie).

The Black Swan
The Black Swan has 66,997 ratings and 3,953 reviews. Nick said: This is a great book. And, to take a page from Taleb…www.goodreads.com

For every great idea, there’s going to be some detractors.

I find this tweet ridiculous. You really can’t think of a way to break up Amazon? Amazon does everything.

And Google? It happens to be a great example of this principal — although in a much milder form. It has a holding company, Alphabet, and it spins out experimental companies, Waymo, Sidewalk Labs, etc.

Also, no company is forced to spin out every single line of business they have. If a business isn’t mature yet to stand on its own — if it’s a money loser for example — keep it. Every decision is completely up to the board and shareholders.

Finally, some people are worried that large companies will lose their competitive advantage; efficiencies of scale or something along those lines. Maybe. But that’s debatable. It could equally play out in the opposite direction.

Imagine for instance if Amazon decided to spin out its warehousing operations. Wouldn’t other companies benefit from all the efficiencies gained by Amazon?

You might be asking if a company would even bother investing in innovation if they’ll spin it off. My answer to you is of course! The investment in innovation doesn’t just disappear. It is sold. A shareholder with one share of Amazon, after the split, would end up with one share of Amazon — priced X dollars lower— and one share of the new company — priced at X. That’s just how spin offs work.

The end result of such policy is no corporate bailouts, no Dodd, no Frank, no endless bickering, no bureaucrats and no government agencies. This is a way to create the right incentives for the companies to behave while making our economy Antifragile (or at least robust).

Antifragile
From the bestselling author of The Black Swan and one of the foremost philosophers of our time, Nassim Nicholas Taleb…www.goodreads.com


Leon Tager

Written by Leon Tager who lives and works in Seattle writing about a better life. You should follow him on Twitter