Originally published October 29, 1984
Big Bad Business
George P. Brockway believes that he knows the lesson of Continental Illinois, Financial Corporation of America, Lockheed, and Chrysler. According to him, it is that “great size, in and of itself, is an economic evil” (“Big Is Ugly,” NL, September 3).
Brockway’s point is that big companies need big bailouts when they fail. True enough. But there are other, perhaps more important, economic evils. We ought to explore the proposition that corporate expansionism can have beneficial consequences, and examine all the effects of the corporate Balkanization he favors.
Consider the electronics industry. Japan competes against us through its handful of giant concerns. The United States, of course, has two that are even larger, IBM and AT&T. We also have a fair number of middling companies and a multitude of small ones. IBM is in fine shape. The telephone company certainly is not, though its difficulties result from its emasculation, rather than from its size.
Many of our other firms are in trouble, too. The basic reason is that in the competitive and mercurial high-tech marketplace, businesses must spend fortunes to create popular new products, yet have to replace them almost immediately with still newer ones. In a situation of this kind it is very difficult indeed to make money.
Of the American companies, only IBM and AT&T clearly have the resources to finance and carry out the kind of research and development that will be needed in future. Japan’s monoliths are smaller, but it has more of them. To compete, we may or may not have to concentrate our economy to the extent that Japan has. But our romantic preference for small, independent businesses is likely to be compromised; at the very least, we will have to permit cooperative R&D, financing and production.
Houston TEDDY GONZALES
Rich Man’s Bluff
George P. Brockway may be a careful reader, but his amended rich man’s dodge of borrowing money, deducting the interest expense from income tax, and investing the principal in tax-exempt bonds (“Between Issues,” NL, September 17) is still wrong. Unfortunately for Brockway’s analysis, and fortunately for the American taxpayer, the Internal Revenue Service has ruled that if one borrows money to purchase tax-exempt securities, the interest on the borrowed funds is not tax deductible. This makes Brockway’s revised scheme either unprofitable or illegal.
School of Business
Southern Illinois University
George P. Brockway replies:
Not exactly. As I said in the original piece, you’ve got to have some money to begin with. Let’s say you have $100,000 in loose cash and a hankering for a vintage model Rolls Royce. You buy some tax-exempts with your own money, and sometime later you borrow $100,000 to pay for the jalopy.
The New Leader