Does government interference inevitably follow government ownership of private companies? It sure seems that way. As a WSJ article reports: “Companies in hock to Washington now have the equivalent of 535 new board members — 100 U.S. senators and 435 House members.” Specifically, the story reports on efforts by various lawmakers to inflence the business decisions at GM. The story begins:
Montana Rep. Denny Rehberg was no fan of the $58 billion federal rescue of General Motors Co., saying he worried taxpayer money would be wasted and the restructuring process would be vulnerable to “political pressure.” Now the lawmaker says it’s his “patriotic duty” to wade into GM’s affairs.
Along with Montana’s two Democratic senators, the Republican congressman is battling to get GM to reinstate a contract with a Montana palladium mine nullified in bankruptcy court. “The simple fact is, when GM took federal dollars, they lost some of their autonomy,” Mr. Rehberg says.
And later in the story:
“I was elected to represent the interests of Montana, not General Motors, which is something that GM should have considered before letting the federal government assume control of their company,” Rep. Rehberg said recently.
Alas, this is but one of many tales of political interference in the once-proud automaker’s affairs detailed by the WSJ, many of which involve efforts to save politically connected auto dealerships. Stuff like this doesn’t make it likely my next car will be a GM.
troll_dc2 says:
I note with interest that it does not seem to matter whether the politician is a Republican or Democrat or whether he favors government intervention or opposes it. Do other countries have government ownership of enterprises without such parochial interference with the enterprises?
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October 30, 2009, 12:50 pmThe Unbeliever says:
If the point of bailing out GM was to “save American jobs”, why not try to save mining jobs in Montana? Government ownership of GM just makes it easier for the government to do a mining bailout, without putting the dollar cost in another embarrassing headline about how many billions they want for more stimulus.
I have a hard time faulting Rehberg’s position here, nicely articulated in that 2nd quote. The government is supposed to look after its constituents, not itself. Once GM turned into Government Motors, it became just another tool for the government to use in enacting its policies, even if those policies are not good for GM itself.
(Of course the government never should have gotten involved with GM in the first place, but try telling that to the Obama administration currently boasting on CNBC about its “success” in turning the economy around after that 3.53% GDP number.)
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October 30, 2009, 12:54 pmCheckEnclosed says:
You may not want to buy a GM car but you should consider selling Ford stock. Now that the government and its organized labor friends are in charge of GM and Chrysler you can bet that they won’t want the domestic competition to do well: No good labor contracts or fair treatment for Ford.
{N.B. This post contains simulated, but not real, investment advice. YMMV, void where prohibited.}
The federal government can no more allow Ford to take market share from Chrysler and GM than the states that take tobacco settlement money can allow tobacco companies to be bankrupted by litigation or otherwise.
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October 30, 2009, 12:55 pmDownfall says:
If GM didn’t want to be interfered with, they shouldn’t have asked for government money. Believe me, I wish it was still possible to get the money back and leave GM to its own devices. As the beneficiaries of political opportunism and America’s obsession with cars, they have little to complain about.
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October 30, 2009, 12:56 pmKazinski says:
What the Right Honorable Congressman doesn’t seem to realize is that GM was taken over to benefit the UAW, not his Montana constituents, they need to get in the back of the line, unless of course the mine is union, and better yet UAW.
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October 30, 2009, 12:58 pmSuperSkeptic says:
”When
GMStates Took Federal Dollars, They Lost Some of Their Autonomy”Equally, maybe even a more, important issue.
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October 30, 2009, 1:05 pmwagnert in atlanta says:
If you keep your present vehicle for another five years and present trends hold, you may not be able to get a GM for your next car.
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October 30, 2009, 1:06 pmCJColucci says:
Well of course if you take someone else’s money you have to answer to a certain extent to whoever gave or lent you the money. Just ask my banker, and he’ll tell you the same thing.
That said, has anything actually happened yet, or are some politicians just making noise?
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October 30, 2009, 1:12 pmRedman says:
Just wait til the newspapers are given federal money.
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October 30, 2009, 1:15 pmJolly Green Chemist says:
When I read the title of the post my mind played a trick on me and I saw ”When GM Took Federal Dollars, They Lost Some of Their Anatomy”. On second thought, I think it rings true. Accepting the bailout meant accepting being neutered.
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October 30, 2009, 1:23 pmMartinned says:
It’s to do with the way politicians are elected. Whatever the benefits of a district system, one of the down sides is this kind of rubbish.
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October 30, 2009, 1:26 pmJimmy S. says:
There are indeed Two Americas.
Our America: You break it, you own it.
Congress’ America: You own it, you break it.
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October 30, 2009, 1:31 pmRandy says:
I don’t like the fact that the gov’t bailed out GM. That money could have been put to better use, like spurring innovation. Eventually, we will lose those jobs anyway, so it’s really just money down the hole.
However, GM became the proverbial ‘too big to fail’ guy. Had they failed, it would not only have brought down a company, but likely an entire industry sector, including suppliers, dealers, and so on. It would certainly have made the recession much worse, and take longer to recover, and that would have cost us a bundle as well.
In short, no good answers. The only real answer is that we should never let any company, be it on main street or wall street, become so big that failing would have a bigger negative impact that rescuing it.
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October 30, 2009, 1:39 pmEric says:
Bravo to Rep Rehberg; he is doing the correct thing in the circumstances. His earlier warnings were ignored, so the only thing left to do is to make sure that companies and citizens in the future understand in bloody terms exactly why they should avoid government bailouts.
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October 30, 2009, 1:49 pmSuperSkeptic says:
How do you propose to know when it’s proper to clip a rising company, before it gets “too big to fail?”
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October 30, 2009, 1:49 pmtroll_dc2 says:
Martinned: are you saying that government ownership avoids this sort of interference only when the politicians are chosen on the basis of a party list rather than from separate districtts?
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October 30, 2009, 1:50 pmpc says:
Wall Street’s America: We break it, you own it. Then we’ll break it again.
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October 30, 2009, 1:52 pmMartinned says:
Government ownership will always lead to rent seeking, that’s why we generally don’t encourage it. (Ahum...) The additional problem with a district system is that it gives politicians incentives to roll in pork that is specifically tailored to their district, in addition to the usual donor-friendly and lobbyist-friendly pork. That’s how you get bridges to nowhere. In a list system, no one has an incentive to do such a thing. (Unless they’re in the pocket of the construction industry generally, but even then there is less silly construction that can be dreamed up.)
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October 30, 2009, 2:30 pmNick says:
Since you just posted an article stating publishers should not make edits w/o noting it, shouldn’t you note the edit to the title of this article???
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October 30, 2009, 3:12 pmpublic_defender says:
So Rehberg’s argument against the bailout was that government intervention was bad because government would use its power unwisely. And now he wants to show just how unwise a member of Congress can exercise power. Brilliant!
“I’m irreponsible with power” is not exactly the most compelling message.
The cliche about consistency and little minds seems to apply here.
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October 30, 2009, 4:32 pmSplunge says:
Stuff like this doesn’t make it likely my next car will be a GM.
Oh, on the contrary. Stuff like this means that the Representative from Montana now has a good reason to interfere in the retail market for cars. How about protective tariffs on Toyotas? Or maybe a mandate that every car bought has to meet certain government standards, which, strangely enough, only GM cars meet? “Green” standards are the obvious Trojan horse there.
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October 30, 2009, 4:55 pmRandy says:
Super: “How do you propose to know when it’s proper to clip a rising company, before it gets “too big to fail?”
I haven’t the faintest idea. But I sure hope someone will!
We used to have antitrust laws, and they worked reasonably well. But with regards to wall street, surely there would be ways to prevent the speculation that led to last years meltdown? In fact, I see just above this thread that George Soros wants to investigate some of this.
But I think that at some point we have to realize that a company becomes so important to the economy that it can dictate government bailouts on its own terms, we are no longer a free democracy.
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October 30, 2009, 5:03 pmnot my leg says:
We still do have antitrust laws, and I think they work reasonably well at preventing (or at least punishing) monopolization (except in the area of predatory bidding). The purpose of antitrust law, however, was never that “big is bad.” Also, in many of these areas I don’t think you could even call the too big to fail firms monopolists. They were incredibly powerful, but nobody would claim GM wasn’t part of a competitive industry.
I am not, by the way, attacking your idea; it may be that there is a point at which firms are so large that their existence poses an unacceptable risk to the economy. I am just saying that antitrust never really prevented that situation.
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October 30, 2009, 5:21 pmRowerinVA says:
not my leg: Excellent post.
“Too big to fail” is a stupid concept and deserves not dicussion but mocking. If you have a machine that takes 5 dollars and generates 4 dollars, that machine should fail ... failure is a very good thing.
The counterargument is that, well, the machine (the big company) may take 5 to produce 4, but it has two components: one that takes 1 to make 3 (profitable), and one that takes 4 but makes 1 (unprofitable). Why not preserve the company so that we can save the profitable component?
The answer is: that’s what bankruptcy law does. The idiot management and investors, who tolerated the creation of the disastrous 4-to-1 component, lose their investment, but the profitable 1-to-3 component emerges from bankruptcy, or gets bought in an asset sale. When you have a machine that takes 1 and makes 3, you don’t throw it out. Doesn’t happen. Never happens. The whole theory of the bailout is that failing companies would trash all their profitable components. FALSE.
The solution to big companies that fail is very simple: put them into bankruptcy and carve off the unprofitable parts, letting the profitable parts continue. There are transaction costs to doing this but they aren’t nearly as large as permitting the company to go one losing money.
If there aren’t any profitable parts (which would include profitable in the near future), there is zero argument for letting the company continue at all — liquidate it.
Yes, it really is that simple.
Regarding the supposed failure of the banking system: you may have noticed all the banks that DIDN’T take federal money. That’s 99% of them, and 95% even by business volume. There is almost nothing more fungible than banking services; if one bank fails, all other banks are capable of providing the services of the failed bank. There may be some ramp-up time, but that dimishes — to nearly zero — if they healthy banks can hire the personnel of the dying bank.
If you were going to choose one industry NEVER to bail out, it would be banks, due to this easy substitutability. The failure of the banking system was a fantasy. Billions have been wasted in an unnecessary bailout. Bipartisan billions, sadly.
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October 30, 2009, 6:40 pmChrisTS says:
I thought that in the case of AIG, for example, the problem was not lack of regulations but flaws in the regulatory system. One flaw was allowing companies to ‘shop’ for their regulator of their preference; naturally, they would shop for the least aggressive one. Another flaw was a piecemeal regulatory system that effectively dices up bits of a company’s interests to different small regulators; the result is that no one has the ‘big picture.’
So, we might need smarter regulation and better enfrocement rather than ‘more’regulations.
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October 30, 2009, 6:52 pmbigjohn says:
“Too big to fail” is a stupid concept and deserves not dicussion but mocking. If you have a machine that takes 5 dollars and generates 4 dollars, that machine should fail ... failure is a very good thing.
I basically agree that this is right on a company-by-company basis, but what about network effects? For example, you might (hypothetically) have 10 companies, 2 of which should go bankrupt, 3 of which are teetering but may survive and 5 of which are in various states of health (let’s number then 1 to 10 from healthiest to least healthy for ease). Couldn’t it be the case that if 9 & 10 go bankrupt, public perception of the problems with the industry push 8 then 7 then 6 into bankruptcy? Then maybe 6 then 5 don’t look so good? That seemed to be the thinking after Lehman declared bankruptcy, rather than just (say) JPM was ‘too big to fail’ on its own.
I agree with you totally when it comes to US car companies — right now we should have Ford and whomever would have bought GM’s and Chrysler’s assets.
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October 30, 2009, 8:15 pmMalvolio says:
I hope they break it.
Callous as it sounds, I hope the government whipsaws GM around until the company is unable to produce so much as a roller-skate. That way, the next company that gets itself into trouble won’t be so keen on a bailout.
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October 30, 2009, 9:22 pmThe Unbeliever says:
Soros? The man who broke the Bank of England?
Yeah, he’s exactly the guy to be giving lessons about restraining investor excess for the greater social good.
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October 30, 2009, 11:42 pmNickM says:
The problem with regulation to stop the speculation is that the government will always rely on experts to identify speculation. The experts here were the ratings agencies (whose expertise is specifically recognized in the banking and securities laws) — and they were completely wrong.
Were the companies dictating bailouts on their own terms that important to the economy, or just that well-connected?
Nick
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October 31, 2009, 4:21 amThe Volokh Conspiracy » Blog Archive » ”When GM Took Federal … One World China says:
[...] the original: The Volokh Conspiracy » Blog Archive » ”When GM Took Federal … By admin | category: lost | tags: abc, bailout, federal-dollars, iphone, kill-the-iphone, [...]
MartyA says:
As GM and Chrysler hire new people and consultants/contractors, imagine the process. Kwamee Kilpatrick, former mayor of Detroit and current ex-con, is contacted by the unemployed son of a former cellmate and, in return for, say, fifty large, asks Kwamee to get him a job, not necessarily a phantom job, but one with minimal demand and maximum compensation. A job that would allow him to become a union officer, a union officer’s muscle or run the football pool on third shift. Kwamee takes the fifty and calls his mother, Congresswoman Kilpatrick, former head of the Congressional Black Caucus, and asks her to call the GM Congressional Relations officer and put in a good word for his “friend.”
In a couple of years, GM won’t be able to make a car that works and their cost structure will require a hundred billion dollars of additional federal money just to meet payroll. A suggested bumper sticker for the Republicans in 2012: “FREE GM!!”
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November 1, 2009, 1:17 pmOff Kilter says:
“I was elected to represent the interests of Montana, not General Motors, which is something that GM should have considered before letting the federal government assume control of their company,” Rep. Rehberg said recently.”
Rehberg is being very short-sighted if he believes his constituents benefit living in a country that tells the world’s investment community, “we take over industries here whenever we feel it in our best interest.”
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November 1, 2009, 2:17 pmHarry Eagar says:
The undertext of this post and comments is that having 535 congressional boardpersons makes for a worse board than GM had before.
I don’t think so.
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November 1, 2009, 2:56 pmSteve says:
I still think that we should sell GM to the Japanese.
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November 1, 2009, 9:06 pm