The landline provider in my neighborhood in New York City is Verizon. I'm in the middle of a support incident with Verizon that I'll describe in a bit of detail, for a couple of reasons. First, because it happens on an infrequent but regular basis. Second, because it vividly illustrates how a government-protected industry deals with its customers.
Why does this matter? Because we're now talking about taking vast chunks of American industry into that happy zone where they have little to fear from market competition, or even from their shareholders and debtholders. Today, Verizon is in that place. Almost immediately, they'll be joined by the Detroit automakers, and by America's largest and most powerful banks. Sometime before Obama's first term ends, America's healthcare delivery system will also be there.
I was in the middle of a phone call yesterday morning, when the line went dead. Fair enough, this happens all the time. I live in New York City, where our infrastructure was once the most advanced in the world. And today, we still have exactly the same infrastructure. The central office that handles my phone service is now more than 100 years old. A lot has changed: Ernestine the telephone operator no longer works there, and they've painted over the windows.
Of course I checked all of my equipment. When I knew the problem was not on my premises, I called Verizon (from a different line). Now Verizon has gone to great lengths to create the illusion of friendly service. Their automated call center operations make it very difficult for you ever to speak to a human being, but the computer-generated messages are pleasant and folksy. Having been through this drill many times, however, I knew what to expect. Sure enough: "we have determined that the problem you are experiencing is in our network, and have made a commitment to fix the problem within 36 hours."
The last time I heard that, I was out of phone and data service for ten days, and had to rent another office just to get my work done. (Unlike Verizon, my business faces competition, and my customers don't want to hear about my phone and data problems.) Today is day two.
It would be one thing if I were the only customer affected by this problem, although that wouldn't invalidate the thesis I'm developing. It turns out that they lost a whole trunk line in this neighborhood, 300 copper pairs. That's a LOT of affected customers.
Verizon, you see, is a government-protected monopoly. They're judged on customer service metrics that they negotiate with state and federal regulators. They really don't have to care about whether 300 people in one neighborhood actually receive the service they pay for and depend on. Past experience suggests that I'll need to talk to Verizon multiple times a day, and physically assault their field-service personnel with handouts and kindness, until I luck into talking to someone who's senior enough and contented enough on that day to actually escalate the problem so it gets solved. Getting feisty and aggressive only makes me a troublemaker. The phone network is smart enough to make sure that troublemakers don't get their problems solved quickly.
Yes, of course, I could pay a godawful amount of money per phone line, to get an SLA with Verizon that would bind them to a certain service level. In practice, however, all that does is to help them manage their own risk. Their SLA requires them to rebate your phone-service fees when they don't provide the service. Since they operate most of the underlying infrastructure, however, they will still cause regular outages.
What I really want, is phone and data service that's 100% reliable. A real phone company that was exposed to market competition would be looking for ways to make sure that their quality of service is nearly perfect.
In industries which are exposed to market competition, the very most important thing you can do is to make your customers happy. You spend a great deal of your time trying to find out what makes your customers happy, and then delivering happiness to them. But if you're insulated from competition, you can relax. You don't have to work as hard to make your customers happy, and you can concentrate on other constituencies, like your shareholders.
And if you manage to get yourself effectively owned and operated by the government, you don't even have to worry about your shareholders.
That's the direction that America's large banks are going, at breakneck speed. Banks that have received extensive assistance from the taxpayers don't really need to worry about their shareholders, and certainly not about their customers.
All they really need to worry about is Congress and the regulators. Today, the two big questions facing America's semi-nationalized banks are: why aren't you lending our money to people who need it, and why are you using our money to pay multi-million dollar bonuses to your senior people?
Now that America's banks are known by all the world to be too big to fail, all they need do is to make sure they have good answers to sticky questions like these. And that's a simple matter of negotiating with Congress and the Administration. Obama gets points for going on the news and saying that it's outrageous for bankers and Wall Streeters to have a huge bonus payday in the very worst year they've ever had, a year in which they lost literally trillions of dollars in equity.
He's right about the fact that this is outrageous, but his outrage will in no way translate to rescissions and clawbacks of bonuses that should never have been paid. The payback might take the form of a slight increase in notional tax liability for the affected banks. Or maybe a character like John Thain, the fired Merrill Lynch CEO who bought a $35,000 commode for his new office two years ago, will prove telegenic enough to be singled out for special punishment. That'll be the extent of it, though.
And let's talk about General Motors. Six weeks ago, the UAW scotched a compromise offered by Senator Corker that would have committed GM and the union to significant cost reductions, in return for government assistance. The UAW had the confidence to do this because they knew that Treasury would come through and use the last of its first-tranche TARP dollars to keep GM from failing by Christmas.
Now, GM is under a nominal obligation to produce an "acceptable" operating plan by March 31, or be forced to return the $13 billion they received at the end of December. They could produce a copy of Crime and Punishment in Russian, and that would be enough to fulfill the acceptability requirement! In the four weeks since we the taxpayers saved GM's life, they and the UAW have done nothing but posture and lobby, rather than put together a painful but financially-responsible plan to keep running as a private company.
And in the meantime, indications are that car sales in January have been just as depressed from historic levels as they were throughout the fourth quarter of 2008. GM will be back to Capitol Hill next month, asking for the next Federal payment in what will become a long saga of all-but-nationalization.
And like Citibank, GM will have to give up the most egregious executive perks like the corporate jets and the multi-million dollar bonuses. But semi-nationalization is a great boon for any large business, which wants more than anything else to be insulated from market competition.
As with Verizon, so with the banking and auto industries, and eventually with healthcare. Get ready for an America in which our service providers have little or no market incentive to provide good service.
This post also appears at MarketsAndPolicy.com.