Essay on "Bailout and Decision-Making"

Essay 6 pages (1838 words) Sources: 1

[EXCERPT] . . . .

Bailouts

The casino industry should not receive a bailout. While it is true that the industry employs thousands of Americans, there is no compelling economic case for such a bailout. As of now, the government has no set criteria to determine which industries should receive a bailout, so the issues are being examined on a case-by-case basis. In evaluating the case of the casino industry, it is apparent that several key factors differentiate the casino industry from industries that have been granted bailouts or for which bailouts are being considered. The most obvious factor is that the casino industry is not in peril. One firm, Las Vegas Sands Corp, is possibly on the verge of bankruptcy. However, it is not within the scope of government to bailout any one given firm. In this industry, there are many competitors such that if one fails, the industry will not collapse. In reality, the casino industry overall is still profitable. The industry lacks funds for expansion; in the auto industry those funds are needed for survival.

That one firm is struggling is a sign that market forces are working properly. The casino business is tied to the general health of the economy. Thus, most firms within the industry can be expected to struggle when the economy stagnates. These struggles form an integral part of the economic cycle. Firms that fail during these situations are the ones with the weakest business models. It is beneficial for the strength of both the industry and the economy that failing business models are eliminated from the economic system. The role of government is to evaluate what is best for the people. In the case of the casino industry, the government should allow the forces of the free market to run their course. In the long run, this will yield the greatest economic benefit and any government interference will only prolong inefficient business models, to the detriment of the nation.

2) the growing call on the part of corporations to adjust payroll costs fails to solve the problem of competitiveness. Pfeffer's article outlines some of the myths that contribute to misguided calls such as these. At the heart of Pfeffer's article is the fact that labor costs and labor rates are not the same. Labor rates are the easily understood dollars per hour figures; labor costs take productivity into account. It is not the total labor cost that matters, it is the labor cost per unit of output.

Indeed, labor costs are not even the biggest factor in terms of competitiveness. In most industries, other factor inputs account for a far bigger percentage of costs. Yet, organizations focus on payroll because they have more control over that cost. This distorts its importance to overall competitiveness. Moreover, they are a poor source of competitive advantage, one that is rarely sustainable.

Therefore, if labor costs are not the key issue with regards to declining competitiveness, managers need to establish what the key issue is. Struggling companies need to understand the reasons why they are failing. There are many considerations that need to be evaluated - it is not simply labor costs that contribute to declining profitability. There have been instances in the past where firms have attempted to salvage their companies by cutting labor costs. GM, for example, attempted to reverse its course with payroll cuts in the 1980s. In addition to botching the plan when they handed out large bonuses to management, the cuts did not address the more pressing flaws in their business model. Outmoded production techniques, long lead times and a poor understanding of the market all contributed more than payroll costs to GM's hardship.

It is often felt that reducing payroll will increase profitability. Yet, this has not been demonstrated to be the case. When asking for government for help in rolling back payrolls, firms need to understand the impacts that such an action will have on productivity. If productivity decreases as a result of payroll reductions, the labor cost per unit of output will not improve. Before firms head to government asking for payroll deductions, they must exhaust all options with regards to improvements in productivity, strategy and other key inputs. Labor is, after all, just one of many inputs in every product and service. In light of that fact, it seems unreasonable that wage rates would be the scapegoat for poor performance, thereby necessitating their reduction. In truth, readjusting payroll costs is unlikely to have the desired effect because it does not address the productivity issue or any other possible key underlying cause of the problem.

3. The issue of government bailouts of struggling corporations is highly contentious. Governments need to take great care in offering bailouts to corporations in times of trouble. Yet, as we have seen in recent months, that is often not the case. The financial industry bailout came with scarcely a week of discussion. A bailout of the automakers is taking a little bit longer, but still seems inevitable. Other industries are now considering coming before government, cap in hand. If the government is going to interfere with the forces of the free market and offer help to these companies, they must firmly establish clear, definable criteria. The government must also take the time to recognize the pitfalls inherent in such decision-making. There are several defects in decision-making that can lead to poor decisions, such as the financial industry bailout.

One of the most significant defects is that of identification. It is well-known is psychological circles that people tend to identify emotionally with solutions to problems that are already encoded in memory. This helps to explain the bailout of the financial industry on account of their lax lending policies - the government did the same thing in the wake of the savings & loan scandal. Having bailed out Wall Street, the government's response to the ongoing struggles of the automobile industry is also a bailout. The government tends towards myopia in dealing with serious problems. The prevailing view appears to be that if enough money is thrown at a problem, it will go away. As we can see with both of this fall's bailout schemes, neither addresses the underlying problems that have lead to the hardship in the first place. The bailouts came about because the people in the government identified with bailouts as the way that these sorts of problems are solved.

Another major defect in decision-making is groupthink. The current economic slowdown is what is termed a "provocative situational context" that encourages groupthink. Groupthink is encouraged in such situations because a sense of urgency, false or real, emerges among participants. With the original bailout, we can see that considerable pressure was applied to the dissenters who voted against the bailout. In the end, and with the help of generous helping of pork, the dissenters were pressured into voting for a bad bill. The bailout of the automakers represents further groupthink. An automaker bailout was not an issue until Nancy Pelosi made it one during an NPR interview the day after Barack Obama was elected. Once the idea was in play, groupthink took over. The response was colored by identification and as with the previous bailout we see dissenters pressured into voting for the bill. Compounding the groupthink issue is the hierarchical structure of the automobile industry. The leaders of the automakers hold tremendous sway over their organizations, and there is little independent thought within the industry if the leaders of the Big Three are in agreement on a topic. Thus, they lead the groupthink that goes on to include all of their stakeholders. They can then convey all manner of mistruths, such as the one that key competitors such as Honda and Toyota have an unfair advantage due to lower labor costs. Indeed, those companies also have higher productivity, faster product development, higher quality and a myriad of other advantages. However, the combined groupthink of the Big Three lends considerable weight to those opinions, erroneous or not. When this groupthink is combined with the groupthink in government, we have a major defect in decision-making, especially considering that the leaders of the group are among the individuals most responsible for the predicament in the first place.

Bias is another major defect in decision-making. What we see with the automakers bailout is that most of the stakeholders have significant bias. The automakers are biased not just by their desire to stay in business but by the enticement of free money and the difference that will make to their bottom lines (and possibly stock options). Members of government also have significant bias. Some are biased because of the activities of lobbyists, while others are from regions where the auto industry is important. Thus, votes become a source of bias is governmental decision-making. There are many other sources of bias as well, from ties with the labor movement to core philosophies about economics. Some biases can even derive from inaccurate portrayals and mistruths that appear in the media. The widely-held view that… READ MORE

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