Too Big To Succeed?

News pops today that the DOJ has approved a proposed merger between Delta and Northwest Airlines.

This puts me in a state of mind to think about Robert Reich’s commentary on Marketplace a couple of weeks back (click on ‘Listen to Commentary’ to hear Reich’s comment, or just read the transcript beneath).  Reich’s argument is that it’s absurd that we’ve allowed companies to become “too big to fail.”

We used to have public policies to prevent companies from getting too big. Does anyone remember antitrust laws? Somewhere along the line policymakers decided that antitrust would only be used where there was evidence a company had so much market power it could keep prices higher than otherwise.

We seem to have forgotten that the original purpose of antitrust law was also to prevent companies from becoming too powerful. Too powerful in that so many other companies depended on them, so many jobs turned on them and so many consumers or investors or depositors needed them, that the economy as a whole would be endangered if they failed. Too powerful in that they could wield inordinate political influence of a sort that might gain them extra favors from Washington.

And the new DelNorTaWest Airlines will be cut right from that mold.  The dislocation to our economy of its failure would be too big to imagine, as personal and business travel would be disrupted for months while other airlines struggle to size up and fill the gaps left there.  And so, DelNorTaWest won’t be allowed to fail.

Similarly, this inspires to me the question raised by the proposed merger between Chrysler and GM.  How is it, exactly, that making already large, unwieldy, and wildly unsuccessful companies even larger and more unwieldy will result in a company more capable of, you know, profitably building popular cars?

I understand the concept of economies of scale.  I also understand that, while it seems to do a really good job in retail, with Wal-Mart of course being the key example, it seems to work much less well in service industries, like the airlines and, dare I say, the financial areas.  Instead of ending up with companies which are large enough to shift the direction of the market, we seem to end up with bloated behemoths which are simply too slow to respond to any shifts in the current, heading in whatever direction they are moving until they run into an even larger, less-agile, object than themselves.

And so?  Well, for one, let’s forbid banks which take funds from the federal bailout from expanding, forcing them to use the cash in some other way.  Secondly, let’s try and convince them to spin out their least successful divisions, letting them either fail on their own, or giving them an opportunity to become something new, different, and better.

Or, as a much-less-desirable alternative, we could nationalize the lot of ’em, making them of a unit with the U.S. Federal Government, the only American institution which is, really, Too Big To Fail.


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