Wednesday, April 01, 2009

Government Control

(and why it's a bad thing)

The US government is taking over General Motors. The President already fired the head of GM and the government will have a say in the make-up of the new board of directors and in future operations.
Another key stakeholder in the company, of course, would be the government, which has lent the company money but does not own any shares. And many analysts believe that whoever the shareholders may be, the government's interest will matter most.

"Obviously, the government has a voice as an investor," said Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware. "But it's not like the government speaks as one voice among many. It becomes the overwhelming voice."

First, this was probably inevitable given GM's requests for bail-out money. The out-going Bush administration was willing to hand over large sums with few strings but the incoming Obama administration is still hungry to put its stamp on everything it can.

A little background - Detroit in general and GM in particular have been trying to restructure themselves back into the forefront of auto manufacturing for decades. Twenty years ago, Michael Moore made his name with Roger and Me, his attempt to confront Roger Smith, the head of GM, over layoffs. Moore wanted Smith to bring prosperity back to Flint Michigan. In retrospect, Smith didn't do anywhere near enough restructuring and Flint was never going to be the paradise that Moore painted it. Had GM rehired all of the unemployed in Flint, then the request for a bailout would have come years earlier.

This is where outside influence in large corporations becomes a problem. The current leadership may not be able to save their company but they are at least focused on that task. Once government gets involved then other factors are introduced.

During the early days of the Iraq war, many liberal hawks said that it was important that Saddam be overthrown but not by this (Bush) administration. Of course, that was the administration that we had and waiting another 2-6 years for a new administration wasn't going to stop Saddam's atrocities.

We are in the same position with GM. It needed to be saved but not by this administration. Obama and the Congressional Democrats have several things on their plate. They recently increased the CAFE millage requirements. They are hostile to executive pay. Members of Congress have talked about requiring GM to produce smaller, more efficient cars. Detroit is a basket case because their costs are so high that they can only make money selling low-millage SUVs but the market for that dried up.

Granted, Obama has ordered GM to get concessions from the unions to reduce manufacturing costs. That should help but the government can't resist using its influence for social good. Assuming that GM survives and continues under government control then we will see ever increasing restrictions on how they do business. This is inevitable. It is how government works.

Look at the last budget and the number of earmarks. Control of GM represents another opportunity for earmarks. This might take the form of pushing the Volt electric car or targeting plants according to an influential congressman's constituency. It doesn't matter. What matters is that these decisions will be made for political reasons, not business ones.

Beyond that, what is there to suggest that the President and Congress are competent to run a large business? They can't balance a budget and most of them (starting with the President) have never run a large company. Many of them are motivated by ideology and a number of the most ideological are in top positions.

This has been tried before. Lots of times in lots of countries. Government control of business just doesn't work.

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