Strategy Op. Ed.

No car industry bailout ... unless they do it my way

On October 13th I gave my remedy for the car industry, ("GM and Chrysler: How the U.S. Chose to Fail"). My plan was probably over the top, but nothing I have heard or read since sounds even close to right. In fact, what I read and hear is so wrong-headed that I want to up the ante on my original plan. Here it goes.

In exchange for the taxpayers bailing out Detroit, we the people propose:

1. GM and Ford will promise even better fuel efficiency than we asked for before. 40 MPG by 2011 and 50 MPG by 2015. All models including SUVs. No nonsense about fleet averages!

2. Chrysler will be spared and be rechristened, Phoenix Motors. Phoenix will not make cars, rather the bailout money will go to developing technology for clean energy engines and systems. One big project ought to be refitting cars and buses for fuel efficiency and reduced CO2. Another ought to be developing high speed trains (target 300 MPG) as we spend billions on transportation. The train unit will be headquartered in New York City and staffed by hedge fund billionaires who agree to take 0 pay in service to their country.

3. No executive will make more than $500.000/yr., including performance-based pay. Designers and engineers who come up with real innovations will be rewarded accordingly -- as if they were the athletes who win the world championships in the big three sports.

I have lots more hare-brained ideas that could save the industry. I think them up as I type. And in the meantime, Washington and Detroit get nowhere because they refuse to accept that Detroit makes lousy cars and management stinks. To reinvent this business we need to kill it and then fumigate.

And one final key measure: Any and all ideas proposed (or supported) by Henry "Hank" Paulsen will be rejected out of hand.

Getting "hot" over greed: Defining the financial crisis

A Dear Reader of my recent post "CEOs and greed: tell me something I don't know" asked me why I left out the AIG story, the one where the managers go and spend millions at a spa just after the government has ponied up a $85 billion bailout. My reader wondered why I did not explain in detail what they drank, what they ate, the tab for champagne, and who knows, maybe they even got in a little lap dancing. My Dear Reader wanted me to crank up the energy and get readers on board.

My Dear Reader is right that I would get more attention if I spelled out gory details of the mind-boggling AIG greed. We, the people, have been "educated" to get hot (stimulated, titilated, and angry) over this stuff. But I resist, I refuse, I object. It's a prurient high I don't want to offer up to My Dear Readers nor to myself. It's the American Puritan tradition in me that resists inauthentic joy.

This goes for watching T.V. news. as well. I am appalled, horrified, embittered by t.v. news. As soon as I hear the word "accident" or "terrorist attack", I know I am going to get an object lesson in the importance of having a strong stomach and how to identify detached body parts. I remember, as you do, the incessant replays of 9-11, the planes crashing over and over into the Twin Towers and us with our eyelids stuck open a la Malcolm McDowell in Clockwork Orange .. without the Beethovan. Yes, we were sickened; yes, we wanted to respond. But all we got operant conditioning outcomes: numbing impotence and sleepless anxiety.

Of course, the networks did not do anything illegal; we were being "informed". And if in the process, our hearts and minds were damaged, whose fault is that? If we had been stronger, we would have shut off the television, closed the "Department of Homeland Security" (a Soviet-style sound-bite ministry of fear) and turned out in mass demonstrations against the war in Iraq and the crime of torturing prisoners. We would have elected John Kerry, no savior of course, but at least not four more years of Bush incompetence and corruption.

Not that we weren't angry, of course. We just could not overcome the feelings of impotence and anxiety. And though the saner, authentic part of us yearned for public dialog about the horrors of Iraq and the decline of America, we watched on television the death and destruction and we did precious little about it.

I deeply dislike t.v. news -- all of it from Fox to CNN. I dislike pornography for similar reasons. Both damage our innate authentic response to experience.

As I have commented elsewhere, if you are watching pornography and not doing "it", that's pretty bad because that ought to make you wonder why that you're watching it and not doing it; if you are watching it because you need it in order to do it, that's not so great either. What happened to passionate, joyful sex between consenting adults who found sufficient material in their own bodies to work with?

So there we have it. None news news and none sex sex. Non news news inures us to the issues that matter and to the hurts and problems we can do something about. And as for sex, which ought to be the source of our greatest physical joys is just another commodity. Woody Allen was wrong when he said that When sex is good it's good and when it's bad it's still good. Bad sex is bad for us just as violence masquerading as news is bad for us.

When we are battered with violent images and when we participate in gratuitous sexual acts, we lose our ability to recognize and engage in authentic information and experience. In effect, we sacrifice our freedom of will.

My argument may sound a bit "touchy feely" for some of you; I recognize that the reductionist categorization of complex human experience. In particular, I realize that sexuality is unfriendly to moralizing. And yet, I believe that the argument is mostly right.

If I am right, where does this message lead us? In America, experience as greed became the substitute for what the great Greek philosophers called "happiness" and the American Declaration of Independence wisely termed our "inalienable right ... to the pursuit of happiness". Happiness is an outcome, not a feeling. Greed is a feeling, a superficial response to experience that only offers temporary satisfaction, like pornography. Greed has no long-term objective, and as such worries little about who losses out as greed has its way.

When there are enough powerful people whose brains are wired so that they confuse Greed with Happiness, we the people get screwed. As the financial crisis unfolds, the daily news now brings us the spectacle of the powerful getting "hot" as they see the great unwashed "deservedly" go down the tubes.

This is my definition of the financial crisis.

Sarkozy's American Strategy: Why France and the U.S. Need Each Other

Once upon a time, France was the most-populous, most-envied nation in Europe; once upon a time my U.S. passport was in English and French. But alas, France never quite got to be Europe's most powerful nation. Napoleon almost got there, but his adventure bumped up against the Russians and that was it.

Like the Spanish and British, the French aspired to be Empire builders. Alas, as colonizers, they sold America for a bowl of porridge and got stuck making a mess of themselves and Africa (see Tavernier's magnificient "Coup de Torchon"); they did slightly better in French Indochina before ceremoniously dumping the whole thing on the remarkably foolish Americans who apparently had learned nothing from Korea.

Today, post-colonial France is a country that tries to play itself as friend to both Muslims and Jews, selling arms and doing what they can to make money in the oil business. (By the way, the Spanish are pretty good at the bait and switch game as well, though they try to focus on South America and sucking money out of South American socialists. The English and Germans do their part as well, all of whom, up to now, have depended on the United States to keep the business going and the Euro in the clouds.

France, Germany and Great Britain would all be happy to run the world, and I have no problem with any of the European democracies individually, or as a group, taking over from the U.S. as the world's superpower so long as that means we don't have to put up with a world run by the Chinese or the Russians. My reason is simple: in democracies the people still have some chance, however remote, of reigning in the stupidity of their leaders. And frankly, if I had to pick a European nation to be the boss, I would take the French, whose food, wine and movies we need to make the world a bearable place to live in. (I will spare you my possible objections to the British and the Germans; the Spaniards and the Italians are not in the running.)

However, as we know none of the European nations, individually, are in a position to run the world, and so we are left with two reasonable choices in sorting out power on planet Earth: 1) Accept the Americans as the Big Enchalada with the usual British, French and German support; or 2) Go back to a balance of power scheme. (Forget about an option 3, a UN utopia with no world superpowers, it ain't gonna happen.)

Option 1 we are all familiar with and understand the pluses and minuses. Option 2 means two or more countries or blocks of countries struggling for economic (and perhaps military) supremacy. Option 2 is a real possibility given how the Americans have screwed things up. Unfortunately Option 2 brings with it many uncertainties, most of them pretty bad as the Chinese arm themselves, the Japanese rearm, and the Iranians actively seeking to become the Muslim world leader.

And so, as the world power structure threatens to come undone, Western Europe finds itself in a bizarre tightrope walk between the EU crashing into pieces and consolidating its status as an economic power that depends on U.S. military power. There is, unfortunately, no real chance of putting together a European military and foreign policy, which means that the Europeans need the Americans.

Sarkozy, the immigrant pragmatist instinctively understands this and has decided to go all out for Option 1 with a reinvigorated role for France as America's interlocuter. Sarkozy, even in 2,000 Euro suits, even with 2 very French wives plus affairs, is still the pushy immigrant, a street fighter who sees things in black and white, and has decided to gamble on the Americans, not because he really believes that they will win, but because the alternative is so bad.

Sarkozy has stuck his neck out. He will need a post-Bush administration that understands that without contintental Europe, in particular France, the United States has no chance of engaging the world diplomatically and will have to rely on an over-extended military guided by an incompetent administration to fight against Chinese domination. Retired Lt. General Ricardo Sanchez's condemnation of the management of Iraq War is just the latest in a seemingly endless outpouring of regret over how we have debilitated ourselves in a terrible "nightmare". We need time to recover and Sarkozy wants to help us get it.

Sarkozy wants to bring France back to the world stage, but he needs a strong U.S. to do it. This is self-interest in its best guise. I am afraid, however, that the next American President won't appreciate what Sarkozy is offering to us and will do something stupid that will oblige Sarkozy to renounce his American strategy.

It is a shame that Sarkozy can not run for President of the United States. But even if he were a naturalized citizen, it would be unconstitutional. It is odd that the only two other politicians who have an idea of what needs doing are an Austrian weightlifter and a black guy with a Kenyan father and a name that wouldn't get him elected dog catcher.

Legal Corruption

There was a 30-year period following World War II in the United States when we made an effort to put our values into practice. It was not just the Marshall Plan or "imposing" democracy in Japan. We did away with segregation laws; we provided housing and education for our veterans; we founded the Peace Corps, the Fulbright Program, the Food Stamp Program. For most Americans life improved, and despite being the most powerful nation in the world, we managed not to be hated. Of course, there were important failures, including McCarthyism and Vietnam and a Latin American foreign policy blind to dictatorship and corruption, but on balance the American Empire was the most gentle in the history of the world.

But since the election of Ronald Reagan, we have been headed in the wrong direction. Not a single American President, Democrat nor Republican, has had a program that would inspire a young person to do anything other than seek wealth. The result has been the institutionalization of legal corruption.

Of course, I realize that the alleged cause-effect relationship claim is almost impossible to prove. How can I demonstrate that the worst part our complex and wonderful national character has been ascendent for more than a quarter-century with disastrous consequences? How do I demonstrate that the self-dependence praised by Thoreau has given way to self-serving with guile, leaving us with little more than self-destructive incompetence?

The best evidence for my argument lies in the layers and layers of legal corruption that we have built into American life for the quater-century. Though the Bush Administration has perfected legal corruption cynically using 9-11 to chisel away at legal protections, they did not begin the process. They are not to blame for the complicity of the Democrats and the American people. We have done as little to stop legal corruption as we have to stop the war in Iraq. Though there are voices constantly telling us what's gone wrong, we seem not to listen and they seem to have no power to change anything.

The Blackwater scandal to illustrates my point. The use of mercenaries was legal, part of a systematic privatization of government. Privatization in itself is not bad, of course. The problem arises only when a decision regarding government policy is reduced to a make or buy decision. Governments are not firms. Only government have a right to send soldiers into battle. Blackwater never should have been in a position to kill Iraqi citizens. The use of mercenaries is anti-democratic. The use of legal mercenaries in a foreign country is a corruption of the system. Yet Blackwater will continue to work in Iraq, and the measures taken to control Blackwater do not fix the problem. Using mercenaries is "un-American".

So did Americans permit the government to use mercenaries? Why are we willing to let life go on as normal in the United States while our soldiers die in battle in a foreign country? Why do we seem not to care about the Iraqis despite President Bush's protests to the contrary?

Perhaps the answers lie in the web of meaning constructed by the conservative movement in the United States that divides the world into have and have-nots, into those with rights and those without. In a divided world of the deserving and the non-deserving, there is always over-determined reasons for doing what the deserving want. This is the basis of legal corruption. It works in China, it works in Putin's Russia, it works in the United States.

It works everywhere; it always has. We invented the democratic social contract to fight this corruption by building a society of laws and not of men. By creating a system that makes it difficult for the bad guys to win.

We know all about this in business. Capitalism was designed to try to overcome some of this behavior. Oliver Williamson, the Berkeley transaction cost economist, describes the behavior of the bad guys as "self-servingwith guile". We expect some individuals to be self-servers and work in their interest and not the shareholders. Corporate goverance is supposed to protect shareholders from these people. But what happens when the self-servers with guile get there hands on the corporate governance? What happens if they get their hands on government and make their self-selving with guile the law of the land?

Blackwater was made possible because of dozens of legal corruptions, large and small. The "small" ones include hedge fund and private equity partners paying capital gains rather income tax on earnings; the automobile industry lobbying against energy standards, pharmaceutical companies paying for FDA studies. These small corruptions cost billions. The truly large corruptions cost thousands of lives. The truly large corruptions include a multi-billion dollar government contracting system riddled with chronyism that buys us private jails and torture. It bought us Blackwater.

... And it was legal. And it is defended as necessary and good by those who benefit day after day.

The underlying "principle" holding together this socio-economic network of self-interest with guile is quite clear: interest group wealth creation is now a legitimate aim. And irony of ironies: our individualistic, meritocratic neo-conservative movement has given us collectivistic self-protection scheme designed to keep the rich rich.

Now you thought that conservatives believed in individualist meritocracy. You were wrong. If they did, they would not struggle so hard against efforts to provide the poor with opportunities to grow up one day and compete with the rich. One of my favorite examples was the Repulbican assault on estate taxes, built around a not-so-clever Frank Luntz campaign to rename the estate tax "The Death Tax". Never mind that Luntz and friends undid a key part of our Rooseveltian social contract: "avoid concentration of wealth and the creation of dynasties."

Political operatives like Karl Rove and Frank Luntz understand that legal corruption is the way to go and that it can be achieved with the consent of the governed. Their strategy is divide and conquer by finding some common ground, no matter how vulgar or cruel, that convinces the losers that they are actually winners. With their help, we have achieved a society divided between haves and have-nots that has convinced itself that the have-nots have exactly what they merit. The self-servers with guile have convinced the have-nots that they too can some day be rich self-servers with guile.

When I was young, I  believed we were committed to building a society that could be based on opportunity and merit. It was about the time that John Rawls' "A Theory of Justice" set out the basic ideas of how to get this done. Hope was in the air and I believed. Why not? We had antibiotics and birth control pills. We had infectious disease under control and sex was good and safe. It was the best of all possible worlds.

Thirty years later, we have AIDS, fundamentalist terrorism and women in full burkas. We have George Bush in the name of The Haves claiming that there's no health care problem in America because The Have-Nots can always go to an emergency room.

I was wrong about the America we were going to have. We do not have a more fair and more just America precisely because we consider the legal rights of privileged interest groups more important than true meritocracy and opportunity. We were lied to by self-servers with guile and we were stupid enough to believe them. We are dismantling the entitlements of the poor and middle-class on the grounds that these entitlements are inefficient and ineffective. (Tell that to my parents who went to City College of New York for free and bought their first house with Veterans Administration home loan.)

In the name of individualism and meritocracy, we have turned our back on the Have-Nots and we have given free reign to legal corruption. Perhaps there is a connection between the two.

Collapse: How the U.S. Is Choosing to Fail

Even the most optimistic Americans have figured out that "the system" is broken. Among industrialized nations, the U.S. is below average and going downhill in education, infant mortality, drug abuse, poverty and crime, much of it caused by staggeringly sub-standard education and health care for the poor.

Among the institutions that is taking a fair amount of the blame is corporate America. This weekend's most e-mailed N.Y. Times article goes by the attractive title, "Bilking the Elderly, With a Corporate Assist". It tells the heart-wrenching story of how off-shore companies buy contact lists of the elderly and infirm from "legitmate" tele-marketing companies, and then steal their savings, aided and abetted by Federal Reserve banking regulations and banks like Wachovia that have collected millions in fees helping the thieves.

The most galling part of the whole scheme is that with the exception of the actual theft itself, the business practices leading up to the rip-off are legal. The result is a 24 hour a day hunting season against the vulnerable, whose only legal protection comes after the fact. A good, though imperfect analogy is the U.S.health care system that refuses to pay for preventive medicine. The difference is that at least the health care system spends big-time to fix the problems for the insured. But in this scam, there is little recourse; the criminals laugh all the way to bank and restitution is rare.

As I have argued on other occasions, the problem is bad regulation. Bad regulation is not de-regulation, not a lack of regulation. It is regulation, but the wrong regulation. If I understand the current banking legal and regulation situation, the use of unsigned checks and access by telemarketing companies to banking records are permitted thanks to tele-marketing companies and banks that lobby effectively to shape the regulations in ways that benefit the unscrupulous. Astonishingly, though most tele-marketing companies and banks do not engage in unethical behavior, they make themselves complicit by defending bad regulation.

I would thrilled to see those bank and tele-marketing companies come forward with serious proposals, developed with civil society groups, to make it harder for companies to have access to people's data and to make it illegal to sell contact information without informed consent.

Unfortunately, lack of commitment by ethical business firms is not the only difficulty. Some worry that restrictive regulation deprives adults of free choice and strangles the economy. These are reasonable concerns. But I would remind my liberal economist friends that definitions of free choice can also include legal prostitution, legal indentured servitude, legal poligamy. In a world of absolute "free choice", defending those who can not protect themselves becomes almost impossible and "free choice" evaporates. The result is abuse of basic rights. It is no surprise that the most effective anti-sex trafficing in Europe is in Sweden, where prostitution is illegal and the purchasers rather than providers are targeted by the police.

I far prefer a world in which we protect the young, the old, the innocent by restricting some adult activities. In the difficult and confusing real world where the vast majority do not receive the necessary education and training, nor have the mental and physical health to live unprotected, our most fundamental sense of human decency requires that civil society provide basic protection.

Defining "basic" is always open to debate, discussion, trial and error, cost-benefit analysis. Like it or not, we are stuck having to think, try, consider, redo, struggle to make the world a better place. Success is hardly guaranteed, and for many it is more comfortable to fall back on an ideology that says that doing nothing is better than doing something. Unfortunately, we have seen the result, and it is awful.

Given the current state of disarray in the U.S., one would hope that we could at least agree that more basic protection is needed. The U.S. data on health care, education, crime, human trafficking, corruption, poverty, the environment is depressingly clear: we are not doing enough and we are doing the wrong things. Our strategy is failing.

My advice to government and civl society organizations is the same that I give to business. We need to go back to the stragegy planning process. Values --> Objectives --> Strategy --> Plan --> Organization --> etc. Unfortunately, most of what I read and hear is either churlish outrage about what's broken or pathetic stonewalling defending vested interests. From time to time, there are good ideas, good projects, but they are piecemeal. They may forestall disaster, but they will not fix the problems. To have any hope of fixing our serious problems, there must be a major coordinated shift from government industrial and tax policies that seek wealth concentration to policies that refocus government on solving our social problems and returning industrial and tax policy to wealth creation in areas such as renewable energy, health and education. Sadly, the current Bush Administration's interventionist industrial, tax and spending policies sink money into useless and corrupt misadventures. (I will spare us all the pain of reviewing Iraq, Hurricane Katrina, federal student loan programs, government required health care bureaucracy costs, pork barrel legistation.)

We must not forget that none of this happens by accident. I repeat: We are choosing to fail. The business community can do its part to help fix the mess by given up lobbying for regulation oriented to short-term profits, abandoning failed self-regulation, and collaborating with government and civil society organizations in making rules of the game that are provide much needed protection and relief.

I realize that most of you will think that this is wishful thinking. You may well be right. If so, we are likely to continue to choose to fail. 

Corporate Identity: Love Our Company and We Will Take You to the Promised Land

As luck would have it, just as Endesa was losing its status as Spain's flagship among the world's largest energy companies, Iberdrola bought Scottish Power and leaped to #5 in the world.

To celebrate its new status as one of the world's mega-multinationals, Iberdrola has launched a corporate identity campaign, extolling the virtues of size and international presence. The television ads run against the backdrop of Iberdrola printed large on the sail of El Desafío Español, semfinalist in the America's Cup. It's all rather majestic ... and here too luck has played its role. The decision to sponsor El Desafío Español was taken years before the takeover, at a time when not many would have bet on the Spanish team reaching the semi-finals.

As for the ad campaign itself, Iberdrola's ad is remarkably similar to Endesa's ambitious "All You Need Is Love" campaign. I'll turn to the two advertising blitzes in a moment, but first a few remarks on corporate identity advertising.

Often corporate identity advertising is done to defend the company against some dangerous weakness, with the company proclaiming to be exactly the opposite of what it is suspected of being. For me, the most striking example is Dow Chemical's launching in 1985 of its "Dow Lets You Do Great Things" campaign to counterattack the company's awful reputation for having provided the U.S. Armed Forces with napalm during the Vietnam War. For those of you don't remember Dow and napalm, I am sure that you will recall Robert Duvall's famous line in Apocalypse Now, "I love the smell of napalm in the morning."

During the Vietnam War, Dow was truly reviled. The company was target of demonstrations on college campuses all over the United States, When I was 16, my college interview at the University of Pennsylvania had to be delayed because of a demonstration against Dow Chemical recruiting on campus.

The demonstrations did not stop Dow from continuing to manufacture napalm and Agent Orange throughout the war. The effect, however, on Dow's reputation was so severe and lasting that the company had to wait a whole decade after the end of the war to go ahead with its clean-up corporate identity campaign.

Dow ran the ad campaign year after year. The company's diligence was rewarded. More than a decade later, when I was finishing up my MBA at New  York University, a couple of classmates mentioned that they were interviewing with Dow Chemical. I recounted my college interview experience. I was a bit taken aback by their response. Though they recalled napalm, Agent Orange, and knew about the breast implant lawsuits against Dow Corning, they still had a positive view of Dow as a market leader and innovator.   

I had to give Dow credit. Years of persistent, upbeat, we help make the world a better place advertising had done its job. In fact, Dow was so pleased with the results, that the company became one of the first to make being green and CSR an integral part of its strategy. Dow's most recent campaign, launched in 2006, is "The Human Element", proclaims Dow's vision of addressing some of the most pressing economic, social and environmental concerns facing the global community in the coming decade."

For those of you who are concerned that this might just be opportunism, it turns out that pledging to be socially responsible does have at least one, important positive effect. Employees and NGOs end up expecting firms to live up to their rhetoric, and when they stray, as was the case with BP, the response can be brutal.

Well-desigend corporate identity programs work. What, then, about Endesa and Iberdrola. On several occasions, I have written about how amused I was by the Endesa's use of the Beatles' "All You Need Is Love" in their ads, as if somehow management knew that without the "love" of Spaniards, the company would get taken away from them. Intuitively, management understood that there was no imperative demanding the continued existence of Endesa. Apparently, no very many of us are convinced that the world is like to be better or worse because of Endesa.

Iberdrola's message is nearly a photocopy of Endesa's. Once again, no one, other than the Spanish government, which wants to have its big multinationals, seems to really care. With all the attention focused on the Spanish government's attempt to keep Endesa, Iberdrola's apotheosis has gone almost unnoticied. In their ad, then, you can sense a yearning for attention. Once again, the music gives it all away. This time it's Carly Simon's "Let the River Run", her version of the traditional "The NewJerusalem".

"The New Jerusalem" was the theme song for Working Girl, a charming Harrison Ford - Melanie Griffith "Dr. Doolittle" retelling, directed by the astute Mke Nichols. As the movie closes, Melanie Griffith, having achieved her aim: the transmorgrification from secretary to boss substantiated by being given an office. And the music kicks. It's upbeat, just a few happy notes to the words of

Let the river run,
Let all the dreamers
Wake the nation.
Come, the new jerusalem.

But the New Jerusalem may not be all it's cracked up to be. While Melanie Griffith's Tess luxuriates in her office, the camera pulls back and back and back to reveal hundreds and thousands of tiny squares windows all exactly alike, thousands of identical dot-sized new Jerusalems, no more substantive than the firms that go by names like Endesa, Iberdrola, e.on, Chrysler, companies with no meaningful institutional legacy, firm that will be bought, sold, privatized like Chrysler or taken public, firms that talk of their proud history, their commitment to same values everyone else is committed to  ... when in fact most companies are simply a collection of assets and activities designed to create economic value.

This is not all bad. Once we get rid of the idea that firms should be created to make the world a better place, we are free to judge the actions of those who are running firms now without the safety net of a proud corporate legacy. There is no fall back position, no appeal to what "the founders has in mind". Management is responsible for its success and failures, both economic and social.

There is no compelling reason to keep Endesa, Iberdrola, or Chrysler for that matter, alive. All we need are firms and management that innovate, create wealth, and behave responsibly. We don't need to love Endesa and we don't need Iberdrola to lead us to the New Jerusalem. Perhaps we could do with less corporate identity and lot more managerial integrity.

Government Regulation and the Competitive Advantage of Nations

As the United States has retreated on regulation, so has the competitive advantage of U.S. companies world-wide.

This sounds paradoxical. How could government regulation, which is said to strangle innovation, be the source of national competitive advantage? Adam Smith would think I'd lost my mind, and Milton Friedman, would send me back for remedial Economics 101 (of course, I'd have to buy the latest edition of his famous textbook).

Here's how it works. Just as countries lose competitiveness for having too much corruption, countries can gain competitiveness by providing for capital a secure environment in which to invest and may provide incentives for innovating, especially as regards environmental and safety and health standards.

When government regulation is done right, it provides the solid rules for how to play the game. Which brings me to Sarbanes-Oxley. As companies complain about the onerous paperwork, capital continues to pour in to the New York Stock Exchange (NYSE), and foreign company listings grow. Sarbanes, however, is only one of many "annoyances". Companies have to meet tough reporting and corporate governance requirements, and, maybe even worse, also put with getting sued in the United States.

Two examples involving Spanish firms listing on the NYSE. When E.On screamed that Acciona and Enel were playing dirty, they sued in the United States. Several years earlier, Terra investors got mad at Telefonica for allegedly destroying Terra's share value, the investors sued In New York as well. Believe it or not, this is actually good for the NYSE. The NYSE's competitive advantage is not that it knows how to run a market -- much of that is technology -- but rather its collaboration with the secure and fair trading environment that the legal system guarantees.

This guarantee in New York is provided by the U.S. Attorney's Office for the Southern District of New York (see "Endesa, E.On, The Southern District Court of New York ... and Rudolph Giuliani"), traditionally an activist court that has defended investor rights and also gone after Wall Street malfeasance with great conviction. For this reason, not just civil liberties and fair elections come under attack when the President of the United States plays games with U.S. attorneys, doing business becomes also become more difficult as investors lose confidence.

Regulation, done right, could also help us get pharmaceutical business out of the courts and out of the newspapers. Not a day seems to pass without some ugly link up between drugs companies, doctors, and the government coming to light. The current spotlight is on legal kick-backs, cash payments that doctors receive from drug companies for prescribing medication that often receives government subsidies. (See the current series in The New York Times.) Proper regulation would stop this, and provide two important benefits. One, billions of taxpayer money could be saved; and, two, drug companies would no longer be able to earn billions on drugs that in some cases are not superior to previous medications. When FDA regulation worked better, before 25% of testing was actually paid for by pharmaceutical companies, innovation was spurred by a respectful and healthy tension between those responsible to bring new drugs to market and those responsible to make sure that they were safe and administered correctly.

This, as well, the Bush Administration has undone, invoking the usual litany of regulation is bad for business, when in fact all they have done is substitute good regulation for bad regulation, often under the euphemism of privatization. Much of this so-called privatization is nothing more than government subsidy scams. A stunningly well-executed example, is the U.S. government guaranteed student loan program which outsources loan grants to private companies. Here's how the deal worked. With the government assuming the risk, companies sprung up (many of them run by former government officials) that tied up deals with universities that gave them access to their students; in turn, the universities received money from the loan companies and university student loan officials ended up as consultants to these companies, or even on the boards of directors. $100 millions have been made at the expense of taxpayers in a close to no-risk business.

Stopping corruption is something almost everyone with agree is good, but I still need to convince you that regulation can be good for business. The NYSE is nice example, but you might argue that it is not really a business, but more a piece of the institutional framework required to do business. Fortunately, I have a really good example of an industry that missed out on the chance to win in the world marketplace through regulation; the American automobile industry.

Comfortable in its mediocrity, the industry blocked any attempt to regulate mileage and environmental standards. Without fail they made the same argument over and over; stricter standard would make cars more expensive and hurt consumers. This was, and still is, nonsense. The payback both for consumers would have come in cheaper gas and maybe even lower insurance costs; the payback for society in avoiding negative externalities -- pollution and injury -- would have been in the billions as well. The price that the industry paid for not wanting to innovate to meet social needs was losing out to the Japanese.

Government regulation has two purposes. One is to protect us from harm by making life difficult for the bad guys. The other is to provide the right environment for the good guys who bring us useful innovation and improve our lives.