29 Apr 2010

Private Sector Profit-Motive And Where It Leads

[This was posted to HU list in a (rather pointless) public sector/private sector discussion.]

and financial institutions being a special species within the private sector, this story does not allow for any generalized critique on the private sector itself.

I would not agree completely with that (but I'll still give some non-finance sector examples below). The finance services sector in the US was where the action was as of the time of crisis. The share of finance sector profits in all corporate profits in the US for 2007 when the crisis was at a peak was 40%, up from 10% in the 1980s (see link). The share of GDP of the finance sector increased from 23% to 31% from 1990 to 2006. The US had already outsourced manufacturing to lower-cost countries, so the predominance of the finance industry is not surprising. And the finance industry does not produce anything, it just moves money around.

That being so, all the efforts of the private sector 'innovators' was centred around that 'hot' sector. So I say that the bad behaviour of the finance sector during that time just shows what the private sector affinity for profits leads to when taken to an extreme limit. And this was achieved by "effectively capturing the US govt" as a former chief economist of the IMF notes (click here to go to the article). And this is how private industry seeks to make things easy for itself everywhere, though they are not successful to that extent. Even if one agrees that financial institutions are a special species - a species making up 31% of the US GDP - then maybe they should not be in the private sector at all.

I'll give non-financial sector examples illustrating the effects of private industry's profit-motive below. Of course, one swallow does not make a summer. But there are stories all around if we look.

To take the effects of the profit-motive on a non-financial sector industry, let's see how where the meat for hamburgers comes from, why and hence how eating a burger made of ground beef in the US is not completely safe. From The New York Times (note that Cargill according to the article is the biggest private company in the US at the time of writing):

... confidential grinding logs and other Cargill records show that the hamburgers were made from a mix of slaughterhouse trimmings and a mash-like product derived from scraps that were ground together at a plant in Wisconsin. ...

Using a combination of sources — a practice followed by most large producers of fresh and packaged hamburger — allowed Cargill to spend about 25 percent less than it would have for cuts of whole meat.

Those low-grade ingredients are cut from areas of the cow that are more likely to have had contact with feces, which carries E. coli, industry research shows. Yet Cargill, like most meat companies, relies on its suppliers to check for the bacteria and does its own testing only after the ingredients are ground together. ...

Unwritten agreements between some companies appear to stand in the way of ingredient testing. Many big slaughterhouses will sell only to grinders who agree not to test their shipments for E. coli, according to officials at two large grinding companies. Slaughterhouses fear that one grinder's discovery of E. coli will set off a recall of ingredients they sold to others.

I would recommend the full article.

Another instance is the drinking water pollution in the US. Again from another New York Times article:

In the last five years alone, chemical factories, manufacturing plants and other workplaces have violated water pollution laws more than half a million times. The violations range from failing to report emissions to dumping toxins at concentrations regulators say might contribute to cancer, birth defects and other illnesses.

However, the vast majority of those polluters have escaped punishment.

[The NY Times ]research shows that an estimated one in 10 Americans have been exposed to drinking water that contains dangerous chemicals or fails to meet a federal health benchmark in other ways.

... stretched resources [at the regulators] are only part of the reason polluters escape punishment. The Times's investigation shows that in West Virginia and other states, powerful industries have often successfully lobbied to undermine effective regulation.

Not exactly a ringing endorsement of private industry. The private military-industrial complex and private oil sector also play a big and not so benign role in the US, which can be observed in countries not so far from us geographically. Here's another example of the oil sector influence on the US govt.

Another example is usage of high fructose corn syrup in fizzy drinks and other food items. HFCS is less costly compared to sugar. Hence it was widely adopted by the processed food industry in the US, including the cola companies. The obesity epidemic has been attributed partly to it. An interesting but long video on the topic and the resulting obesity problem: http://www.youtube.com/watch?v=dBnniua6-oM. The doctor explains a neat trick used by the cola companies : they include caffeine in the cola. caffeine is a diuretic, so it makes the drinker thirsty. So guess what he/she is going to do? Yes, pop another can of cola!

The story of pharma companies seeking to influence doctors by giving gifts, free trips, and other incentives has been around for some time (see link to an article in The Hindu). Of course, this is happening in India now too.

No wonder the American people are losing faith in their institutions including businesses (see link to Time.com article).

I also disagree that the story of the crisis was "incredibly complex". Though the technical details of some of the financial instruments etc are definitely difficult to grasp for lay people like me, the basic theme is simple: greed. The basic story is also pretty straightforward as I understand it: Giving loans to anyone who had a pulse, packaging the loans, and then dicing and slicing the packages into all kinds of different financial instruments and selling the instruments and placing bets on these instruments failing, backed by insurance provided by reckless (or clueless) insurance companies.


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