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Brooks Wilson's Economics Blog: The Obama Administration and GM

Tuesday, June 2, 2009

The Obama Administration and GM

The Obama administration has been the de facto owner of GM for some time, firing GM CEO, Richard Wagoner, hiring the new CEO, Fritz Henderson, broadly determining the new marketing plan and restructuring debt.  Through bankruptcy proceedings, the courts are making the federal government the de jure as well as de facto owners.  Peter Whoriskey, Kendra Marr and William Branigin of the Washington Post ("Obama: GM Restructuring Plan 'Full of Promise'," June 1, 2009) report President Obama comments on the bankruptcy filing.  
In a speech at the White House hours after GM filed for Chapter 11 bankruptcy protection in New York, Obama hailed GM's plan to emerge from its current woes as "credible" and "full of promise." But he also sought to reassure Americans skeptical about the plan's provisions to transfer a 60 percent ownership stake in the company to the U.S. government in return for an additional investment of about $30 billion during and after the bankruptcy process. The new infusion of cash will bring the total U.S. commitment to GM to about $50 billion.

"We are acting as reluctant shareholders, because that is the only way to help GM succeed," Obama said. "What we are not doing -- what I have no interest in doing -- is running GM."
Steve Rattner, head of Obama's auto task force also affirmed the government's desire for limited decision making saying that the government would be passive owners (Jim Puzzanghera. "U.S. role at GM to be passive, Obama vows,"  Los Angeles Times, June 2, 2009).  While past performance is no guarantee of future results, it often is illustrative.  I hope but doubt that government funding of GM is at an end as well as its intrusion into management.  The Obama administration should avoid mixed public-private ownership because there is ample evidence that this structure is problematic in the auto industry.  Ion Mihai Pacepa, the highest ranking Soviet bloc official granted political asylum in the U.S., and the author of the memoir "Red Horizons," was Romanian dictator Nicolae Ceausescu's "Car Czar."  He describes several unsuccessful government attempts to product cars, including his own which I quote below.
Ceausescu tasked me to mediate the purchase of a minimum, basic license for a small car from a major Western manufacturer, and then to steal everything else needed to produce the car.

Three Western companies competed for the honor. Ceausescu decided on Renault, because it was owned by the French government (all Soviet bloc rulers distrusted private companies). We ended up with a license for an antiquated and about-to-be-discontinued Renault-12 car, because it was the cheapest. "Good enough for the idiots," Ceausescu decided, showing what he thought of the Romanian people. He baptized the car Dacia, to commemorate Romania's 2,000-year history going back to Dacia Felix, as the ancient Romans called that part of the world. In that government-run economy, symbolism was the most important consideration, especially when it came to things in short supply (such as food).

"Too luxurious for the idiots," Ceausescu decreed when he saw the first Dacia car made in Romania. Immediately, the radio, right side mirror and backseat heating were dropped. Other "unnecessary luxuries" were soon eliminated by the bureaucrats and their workers' union that were running the factory. The car that finally hit the market was a stripped-down version of the old, stripped-down Renault 12. "Perfect for the idiots," Ceausescu approved. Indeed, the Romanian people, who had never before had any car, came to cherish the Dacia.

For the Western market, however, the Dacia was a nightmare. To the best of my knowledge, no Dacia car was ever sold in the U.S.

I hope that we can avoid the fiascos described by Pacepa; taxpayers are already on the hook for tens of billions.  Mitt Romney suggests a plan that would limit taxpayer losses ("Gordon Trowbridge. "Romney balks at government ownership of GM," The Detroit News, May 31, 2009).
The Obama administration and the United Auto Workers should immediately distribute their stock in a restructured GM to American taxpayers, former...presidential candidate Mitt Romney said Sunday.

I would be happy if the the government and the UAW sold their shares in monthly prescheduled blocks of ten percent beginning in January 2010. 

1 comment:

  1. Many people may "balk" at the government ownership of GM, but I don't see it as a huge deal right now. I was watching television recently and I heard one of the best analogies regarding the government taking over GM. The man said that if your house was up in a blaze and someone went in to save your children from dying in the fire, it's not the time to cry kidnapping.
    Jacinta Tatman