Opinion

Moral hazards ahead

Peter Roff Contributor
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If the United States had a true free market economy, companies that made bad decisions would have to face the consequences of those decisions. But the U.S. has a mixed economy, meaning — among other things — that the federal government all too often steps in to protect companies from the consequences of their mistakes.

Some people call it the “too big to fail” syndrome. Others regard it as favoritism. Still more say it constitutes political pandering. Whatever it is, it happens too often and taxpayers end up paying for it.

It’s happening again. Right now, Congress is considering legislation rewarding risky behavior and irresponsible management of a financially distressed trucking company, Kansas-based YRC Worldwide (YRCW). If passed, this legislation will put YRCW’s competitors at a disadvantage and strain the pension plans of hundreds of thousands of American workers.

Kansas Rep. Lynn Jenkins’s bill, H.R. 1969, would waive a provision in an existing law that prohibits the most critically underfunded pension plans from allowing companies to reduce contributions until the plans are stable.

By way of background, YRCW negotiated a deal with the International Brotherhood of Teamsters to pay just one-fourth of what it owes annually to multi-employer pension plans associated with the union. The deal forces other companies participating in the plans to cover the costs. If they can’t, and H.R. 1969 becomes law, taxpayers may have to cover the $300 million cost.

It is axiomatic that the federal government should not be picking winners and losers in the marketplace, but that’s exactly what H.R. 1969 would do. It would give YRCW the ability to price out its competitors, jeopardizing tens of thousands of jobs with otherwise viable employers.

To the extent that this setup drives other companies out of business, it will weaken the most troubled multi-employer pension plans by further reducing the plans’ contribution bases, since surviving companies will have to cover the defunct companies’ pension obligations.

If you think it doesn’t make sense for the Teamsters to negotiate a deal that would penalize other unionized companies and thousands of employees, think again. The union has direct economic ties to YRCW and has a vested interest in seeing the company succeed — no matter what else happens.

In exchange for the reduced pension obligation, YRCW has granted the Teamsters a significant equity stake in the company and board representation, meaning the union now has a competitive interest in seeing the company’s competitors fail. If this isn’t a conflict of interest, nothing is.

Government should not press its thumb on the scale to favor one company over another. Doing so violates the free market. In this case, it would also violate the trust of American workers.

Americans will not and should not stomach this kind of interference in the marketplace. Nor can they afford to. H.R. 1969 creates exactly the kind of moral hazard that produced the current economic collapse. It will undermine long-term retirement security by hurting both current and future retirees by dramatically reducing the amount of pension benefits they will receive and accrue over time. It also sends exactly the wrong signal to the markets: that if a company is poorly managed, makes bad decisions and takes enormous risks, the government will step in to make sure it succeeds anyway by pricing out its competitors — even if that means bankrupting entire companies and pension systems and leaving future generations to pay the bill.

Peter Roff is a senior fellow at the Institute for Liberty, a Washington, D.C.-based think tank.