GM and Mixed Public-Private Ownership

Regular readers know that I prefer private ownership to public.  Markets are simply better at providing goods and services.  Unlike many writers, bloggers or otherwise, I do not believe that President Obama is a skulking socialist despite his mounting zealous interventions into markets.  Those who oppose his policy might extend their economic vocabulary of economic systems to better describe its weaknesses.

In a past blog post, I gave a partial defense for temporary nationalization of weak banks, arguing that this would be preferable to public-private ownership.  Briefly, I believe that the partial nationalization of GM is worse than the nationalization of a bank like Citibank because public-private ownership confuses institutional goals, and because the market structure of the auto industry is less competitive than the banking industry, increasing the probability of opportunistic behavior. 

Yesterday, the U.S. (60%) and Canadian (12%) governments, the United Auto Workers (17.5%) and previous bondholders (10%) became the owners of General Motors.  Because the ownership is mixed, the goals that the firm pursues will be unclear.  The government may try to produce environmentally friendly cars they believe are in the public interest.  The union may try to improve wages or other member benefits.  The former bondholders will want profits.  To produce environmentally friendly cars that do not maximize profits, the government may supplement profits with payments from taxpayers, or they may limit foreign competition.  Innumerable opportunities to circumvent market mechanisms exist.

The market structure of the auto industry compared to the banking industry increases the probability of opportunism by any of the owners.  There are simply few competitors making opportunism easier.  In a Wall Street Journal article titled, "Obama Motors Co." dated June 2, 2009, the authors give examples of conflicting goals and opportunistic behavior by the government to achieve its goals by weakening market mechanisms.

The Obama administration continues its campaign against bondholders. 

Every decision the feds have made since December suggests that nonpolitical management will be impossible...Treasury bludgeoned the bond holders in both Chrysler and GM to take pennies on the dollar, which will not make creditors eager to lend to the companies in the future.

Combating global warming and increasing energy security, two stated goals of the Obama administration, take a back seat in a small vehicle to the UAW, part of big labor, and major Obama campaign contributor.

There's also the labor agreement that the UAW approved last week, which goes some way toward reducing costs but probably not enough to make the new, smaller GM competitive. The new agreement simplifies some work rules and job descriptions but makes no reductions in hourly pay, pensions or health care for active workers. The agreement must also be renegotiated in two years by an Obama Administration running for re-election and weighing the need to keep Big Labor happy against the risks to taxpayer-shareholders. Who do you think wins that White House debate?

The Administration's concessions to the UAW also restrict the company's ability to import smaller, more fuel-efficient cars that it already makes overseas. UAW President Ron Gettelfinger boasted on PBS's "NewsHour" last week that "we, quite frankly, put pressure on the White House, the [auto] task force, the corporation" to bar small-car imports from overseas. GM is also selling its Opel operation in Europe as part of this restructuring, and the Washington Post reports that one of Treasury's sale conditions is that Opel's new owners must stay out of the U.S., and even out of China, where GM's business is strong.

  The Obama administration would exempt itself from antitrust rules it claims to value.

This is raw trade protectionism. It is also textbook cartel behavior and would be an antitrust violation if practiced by a business. But the benefits for GM are illusory because the import limits mean the company will have to spend even more to retool its domestic plants to make the little green cars that President Obama and Congress are demanding. No one knows if Americans will buy such cars, even if GM can make them competitively in the U.S.

Congress will also exert ownership control. 

The Administration promises to wield a light ownership hand, but it's only a matter of time before Congress starts to micromanage GM's business judgments. Every decision to close a plant will be second-guessed, much like a military base-closing. And what about buying parts from foreign suppliers? Will those also be banned when Mr. Gettelfinger demands it, even if the costs are lower? GM's managers and directors will have one eye on enhancing shareholder value, but the other on pleasing their political minders in Washington.

The larger corruption will be when government tries to vindicate its ownership by favoring GM over Ford and the other auto makers that aren't wards of the state. The TARP legislation contained one blatant example in the form of a $7,500 tax credit for consumers who buy GM's new electric car, the Chevy Volt. Expect more such favoritism, including huge new subsidies for green cars if consumers prove resistant to their charms.