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The Great Debate

GM shows Obama is no Vulcan

May 29, 2009

obama– James Pethokoukis is a Reuters columnist. The opinions expressed are his own –

Here’s why the U.S. government’s growing control over General Motors — Uncle Sam may soon own some 70 percent of the troubled U.S. automaker — is so vexing: This is supposed be the “no drama, no emotion” White House, a place where cool, calculating reason holds sway.

If George W. Bush was the presidential version of the impulsive Captain Kirk of “Star Trek”, then Barack Obama’s supposed counterpart is the superbrainy, hyperlogical Mr. Spock. (It’s a much-bandied about analogy here in Washington, one that the current president says he’s aware of. Indeed, he actually seems to dig it.)

Then you have the highly regarded White House economic team. It’s a bright group steeped in the latest behavioural economics research, a revolutionary field which theorizes that human decision-making is riddled with “cognitive biases” (such as seeing patterns in random sequences of information) and psychological quirks. Homo economicus and rational agents we usually aren’t, say behavioural economists.

Given all that intelligence and self awareness, it’s surprising to find Team Obama’s approach toward GM (and Chrysler, for that matter) marbled with so much illogical economic policy that could have a terrible long-run impact:

1) Bullying creditors. Yes, bondholders may well accept General Motors’ new proposed offer of 10 percent of a reorganized company and warrants to purchase another 15 percent. But that doesn’t change the topsy-turvy reality of unions being favoured over creditors.

Coming out of bankruptcy, the government could own 72.5 percent of the automaker, the United Auto Workers 17.5 percent and creditors 10 percent.

By favouring a political ally over the rule of law — in this case, the fundamental principles of contractual rights — the White House has created both a terrible precedent and enormous uncertainty (perhaps resulting in even higher interest rates for borrowers with worrisome debt loads) as the government continues to inject itself into the private sector.

2) Perpetuating “too big too fail”. Back in December, GM submitted a plan to Congress requesting $4 billion to get through the month and $8 billion to operate though the end of 2009 with the option of an additional $6 billion if the economy really went into the tank.

Imagine if instead asking for $18 billion, then-CEO Rick Wagoner had asked for $50 billion? A more accurate figure since that is apparently what it is going to take to get the company through its probable bankruptcy — with tens of billions of U.S. taxpayer money needed in the future.

Maybe Congress would have balked, though probably not. But many millions of American taxpayers would have had a better idea of what they were getting into.

Letting GM and Chrysler fail would certainly have made the economy worse off and raised unemployment in the short run. But by sheltering companies from the full effects of their own poor decision making, Obama risks creating a less competitive business climate here that could result in higher long-term unemployment as seen in Europe.

3) Creating an auto policy that doesn’t match energy policy. What if GM and Chrysler, at the behest of the U.S. government, create a bunch of small, gas-sipping cars that Americans don’t have much interest in buying unless pump prices start creeping toward $4 a gallon?

Be prepared for even more losses. Now one way to generate interested buyers is by instituting a gas tax that would put a floor under gas prices.

But the Obama administration apparently has no interest in this approach anytime soon. In a new interview, Energy Secretary Stephen Chu said a gas tax wouldn’t be “politically feasible” during a recession. Any sort of carbon tax where the money goes straight back to the government will probably never be politically feasible in the United States. But balancing it with a cut in, say, payroll taxes just might be.

Maybe, in the end, Team Obama is merely falling prey to the classic behavioural economics phenomenon of sunk cost bias. Unrecoverable or difficult to recover costs already incurred tend to influence people’s future decision making, studies show.

Let’s say you have already paid for pro basketball tickets but there’s a terrible storm on the night of the game. You’ll have a tendency to still attend the game because you’ve already paid for the tickets. This is also called good money chasing after bad. Unfortunately for taxpayers, a lot more of their good money is headed into GM.

Comments
76 comments so far | RSS Comments RSS

What worries me more is that nobody seems willing to point out that allowing political contributors to keep their dealerships open, while simultaneously closing competitors’ dealerships smacks of some unsavory political favoritism. Why is the media ignoring this issue? And why is it that the Obama Administration can continue to create such monsters without any outcry from the media? In a similar vein, why is nobody concerns about the downside of a “Cyber Czar?” On one hand, sure, we need internet security. On the other hand, how do we know that this isn’t just another way to keep political opponents quiet? What do you want to bet that suddenly some conservative blogs and websites can’t find servers once the new apparatus is in place? Slippery slope, folks, slippery slope. I said before that their ain’t no such thing as a free lunch, and I think pretty soon a great many Obama supporters are going to find out the real results of their vote.

Posted by Ellen K | Report as abusive
 

Anyone who believes GM and Chrysler are being directed down the wrong path because the concept implies $4.00 gas should be summarily dismissed as an ostrich.

For those who believe the 2016 fleet targets are unattainable, just look at the MPG ratings for the Toyota Camry and Toyota Prius. Taken together they meet the 2016 standard in 2009 and the market has shown a lot of people want to buy these cars. Perhaps GM can create similar attractive offerings.

Posted by syzygy | Report as abusive
 

I’m an English teacher working in South Korea, and even with my limited knowledge of economics I can see the U.S. economy snowboarding off a cliff under the the gentle tutelage of the Obambi-Ayers-Wright junta.

Back in the OSSR , boys! You don’t know how unlucky you are boys, back in the OSSR!

I think everyone can guess what the “O” in the OSSR means.

Long live the Holy Trinity-Adam Smith, John Galt and Dagney Taggert!!!

Posted by Michael Gallagher | Report as abusive
 

“In fact thank them when your car starts in the morning to get you to your job or home in a storm. Everyone from the engineers to the line worker is skilled.”- Posted by Dean
_________________________________
Yes, I thank the engineers who designed my car. I thank the workers who built it. The Swedish engineers and workers. And I also appreciate the American non-union workers at Volvo dealership who keep it running, service after service, year after year. And who put it right when it was hit hard from behind. And especially appreciate the ones who built in it the strength to withstand hits like that. The Ford Windstar van – much bigger and heavier vehicle, built by UAW, that hit my Volvo, was taken away by a flatbed, its front completely smashed, driver taken by ambulance. I drove the Volvo away, and my family didn’t suffer as much as a scratch.
Before getting into Volvo I kept open mind, and would have considered an American car if the price and features were right. Now, and especially after reading this piece, I will consider a car built by UAW only when the hell freezes over.

Posted by Anonymous | Report as abusive
 

I have owned various GM vehicles/trucks for my businesses in the past. However, Government Motors is never getting any of my money or business in the future. I refuse to do business with any company that abuses the rights and claims of corporate bondholders solely so that union workers can be paid back for their campaign contributions by the Obama administration and continue to be grossly overpaid for the services. I will buy either from Ford, the only American company with enough courage to refuse TARP money try and survive on their own merits (even if their UAW workers are overcompensated although not as bad as the other two bankrupt US auto companies); or I will buy from other foreign automakers, who incidentally also hire hundreds of thousands of American workers and are more competitive in the marketplace.

Posted by David | Report as abusive
 

I don’t see any logic in the direction the current administration has chosen. In its stead I see an almost willful arrogance to discount the logical course of action. While most households in western societies are being prudent – cutting expenditures and trying to minimize their exposure to the economic downturn, the administration is doubling their deficit spending, manipulating capital markets through massive intervention programs and going off the reservation in terms of monetary policy.

With academics at the helm of the economy, the administration has “rolled the dice” and their Keynesian approach to the solution had better work, because it’s the only card in their hand! Unfortunately, the approach may have witnessed its only success in simpler times, when economies of scale were dominated by imperial interests and not the complexities of globalization.

The exposure is considerable! The record deficit spending will devalue the currency, increase interest rates which in turn will drive inflation. These conditions are toxic to the formation of capital markets and the resulting unemployment combined with stagnant growth paint a very bleak picture for the US economy.

The only logical thing for the administration to do was to cut spending drastically, lower taxes and let the market work itself back into a state of prosperity. It would’ve got there on its own, without any intervention, if only given the chance.

Posted by gregson | Report as abusive
 

I will never buy a GM car from a government run car company.

How long will it be before the government REQUIRES you to buy a GM or Chrysler? Or, they will tax other cars so heavily, that you will have to buy from them. America as we know it is gone…….

Posted by Skippy | Report as abusive
 

I remember when the federal government decided – in its infinite wisdom – that no toilet could use more that 1.6 gallons per flush. The National Energy Policy Act of 1995 it was called. Except, the initial models were terrible. The crap wouldn’t go down, and they plugged up. There was an active smuggling operation bringing toilets down from Canada that exceeded the 1.6 gallon usage (but would actually work) for almost a decade.

Chryslet and GM were already selling small cars (at less than their cost of production) just to keep their fleet sales up to CAFE standards. Now the federal government is saying to them to stop selling the cars that people were actually buying at a profit and sell cars that no one wants and that even if they did, Detroit would be another decade actually getting the bugs out of the new cars.

If Detroit thinks this is the path to profitability, they are wrong. It is the path to permanent government dependency for the UAW while foreign manufacturers take all the jobs.

Posted by George Hanshaw | Report as abusive
 

I hope all you lefties cheering on Obama Motors are going to belly up too buy those vehicles. Because no true conservative will ever consider doing so. If Obama and crew want to break the back of capitalism, I for one want to break Obama Motors.

Obama and the democrats have been running roughshod over conservatives with glee in so many ways. But now they are going to learn the rule of unintended consequences, one can forcibly drive horses to bad water, but you can’t make them drink it. It is a way to strike back at Obama, and strike back hard, by not buying a damnable thing from any enterprise he has control over.

Posted by Travis | Report as abusive
 

This is a kabuki dance – it has nothing to do with saving GM – that’s just the fig leaf – the real intent is to grift as much taxpayer money as possible before liquidation. No one will buy these government cars – well almost no one – government will buy them along with some other coerced entities, but that’s it. It’s all about squeezing every last dollar out of the people least able to say no, the investors and taxpayers.

What’s interesting is the wave of boycott talk at the idea of buying a GM car, now tainted with the curse of government ownership. If that GM boycott transmutes into a tax boycott, a tax revolt, then you might see real “change”.

Posted by JohnnyO | Report as abusive
 

Not allowing GM and Chrysler to go bankrupt dooms this economy in the long run. They would have reorganized, and emerged as better companies. Instead the government, legally or otherwise, in order to please the unions took these companies over. The “concessions” the unions made were not nearly enough. It is criminal what the administration did. These car companies are going to be worse than anyone could ever imagine.

Posted by lee | Report as abusive
 

Silly Travis,
Liberals don’t buy American cars, knuckle dragging red staters do, or did until GM became OM. I have purchased only American brands up until now, 1 Jeep, 2 Mercury’s and most recently a Pontiac, but from now on I’m only going to buy cars built in Red States like Toyotas or Hondas.

Posted by Dave | Report as abusive
 

I strong Obama supporter, but one of the main reasons I have been is Bush’s disrespect of the rule of law. I felt Obama would have a strong fidelity to the concept of the rule of law taking precedent over temporary political situations. As a result, I have to agree with the author strongly and say that I am very disappointed with regard to Obama’s handling of GM. If it is not a result of emotionalism or “sunk cost bias” (as the author says, then the only other explanation is an overwhelming prejudice in favor of unions over investors. The treatment of secured creditors in this situation, and in Chrysler, is a very blatant case of putting personal political goals of the moment over and above the rule of law and it does not portend well for the cost and availability of future secured credit. As an attorney that has worked on past asset backed/secured credit projects, I can guaranty that this will effect the deals I see in the future. And the effect will NOT be more projects and more jobs. I must agree with the author as having nailed his analysis on this situation and say that I am very disappointed with Obama.

Posted by D. Abercrombie | Report as abusive
 

Travis, your righteous indignation is partially misdirected. It was Bush who began the bailout for GM and Chrysler. Do you really think Republicans are conservative and Democrats, liberal? And what of the gargantuan rescue of the financial industry that the auto bailout pales to in comparison. The government runs day to day operation of banks. Both parties began signing away our future long before the second Bush arrived on the scene.

The finance and manufacturing industries are under government control. Next will be energy, insurance and health. Our institutions and cities are crumbling all around us. Yet we are told the worst is over and things are getting better. For who?

The decline of capitalism an ominous development. Karl Marx stated that a society and their government that become fascist is a symptom of capitalism in decline. The first half of twentieth century world history makes a great case study for Marx’s claim.

Posted by Anubis | Report as abusive
 

America is in a profound crisis that nobody seems willing to refer to by name, but which too many biased commentators appear to think is “almost over” as though it would just “go away” the way it just somehow “happened”.

But because it didn’t, it won’t.

This crisis is no accident. It was engineered, and it won’t end until the command-level crimes that caused it are prosecuted.

There is no way America can spend its way out of the crisis, because at consumer level there is virtually nothing left to spend that hasn’t been tainted and mortgaged by white-collar criminals who need rounding up and jailing like any other common Somali pirates.

The problem is, this problem isn’t new. It’s safer than any GM vehicle to say this epidemic crisis of monumental proportions cannot be solved or healed by subsidizing incompetence and duplicitousness, i.e. by donating bipartisan “billions” aka Trillions to the very same power-drunk kleptoholics who drove America into the ditch, and have been doing so for several decades now.

To suggest that the current administration is interested in anything other than doling out public money and public excuses by the ton to the same old zombie predators, to the point of public extinction – any more or less so than the previous White House cabal, is the height of lunacy.

General Motors is a joke with no punchline. If Obama were the least bit serious about ending the crisis at General Motors, he the first thing he ought to have done would be to appoint Ralph Nader as Auto Czar.
But of course, he didn’t.

Meanwhile the crisis continues without end. It’s not just about cars, it’s about whether America intends on going anywhere, at any speed, ever.

Apparently however, bipartisan America is more interested in spending its declining years on blocks in the front yard until its wreckers finally come off the publicly subsidized meth binge and report to their parole officer.

Posted by The Bell | Report as abusive
 

The phrase “Buy American!” will soon become an Offer You Can’t Refuse.

Posted by Neil Ferguson | Report as abusive
 

The message of Pethokoukis’ piece is much appreciated. Obama and Co. are well on their way towards “. . .fundamentally transforming the United States of America.” Unfortunately for the people of the U.S., this means the third phase of soft fascism, American style (phase one = FDR’s New Deal, phase two = LBJ’s Great Society): More spending, regulation, intervention, and taxation; less freedom, choice, self-determination and liberty.

Minor quibble: Did Pethokoukis come too close to the line of not giving credit for his basketball ticket example? Or is this a common story around the ‘net?

http://litemind.com/sunk-cost-bias/

Posted by Marshall | Report as abusive
 

Maybe he is a Vulcan, and after he has transferred America’s, and as many other countries as possible, liberty and wealth to the already wealthy he will pull out his communicator and say “beam me up” as he disappears into thin air.

Posted by Peter H | Report as abusive
 

Let’s cut to the chase. This Messiah is a disaster.

Posted by Independent60 | Report as abusive
 

We are in big trouble…

Show me a government entity that runs efficient, cost effective

There is no-way that we can competitive at global level which our American automobile with this level of inefficiency

But i’m praying that i’m wrong

Posted by Sam Q | Report as abusive
 

Looks like the Vulcan is a bust.

Where is a Ferengi when you need one?

Posted by Anon. | Report as abusive
 

The government could do something. Right now they take in tremendous sums of money in taxes. Once they set money aside for the military, infrastructure, boarder security, congressional sessions, and the courts, they should return the money directly to the population instead of using it run poor quality programs themselves.

That way you and I have a real financial safety net. Let the government institute a national sales tax of two percent on all commercial sales. They can collect this money and keep forty percent for their operations and give the remaining sixty percent back to you and me.

This frees businesses from having to pay into retirement plans. It eliminates the union/management struggle, and it gives every American the means to provide for their own health care and education by utilizing the markets.

Profit is still possible. But the profit motive does not rule the economy. And providing a truly equal social safety net encourages risk taking and innovation, which sparks industry. This in turn produces more tax revenue, sixty percent of which goes to the social safety net. The cycle is one of sustainable growth.

You end up with smaller more efficient government, a free market that can profit, and a consumer base that is being invested in.

 

Tired, your acts are dead wrong. The U.S. had very little debt in the 1920s and 30s. New Deal borrowing did not accrue until the end of the first FDR administration. The government literally took years figuring out what to do. Public spending began twice. In 1936 and 1939. During 1938 the economy tanked again after FDR won his balanced budget in 1937.

The Lend Lease Act increased deficit spending way beyond the New Deal programs. The deficit was staggering and was the first step to lifting the nation out of the Great Depression. GDP grew rapidly. Debt reached in excess of 125% of GDP by 1943, the highest it has ever been. High wages, price controls and rationing mandated by Washington ensured workers would earn far more money than they could possibly spend. So the American people saved and bought war bonds. These domestic policies in my view created the middle class. The vast savings and appetite for automobiles lifted the nation out of the recession subsequent to WWII.

As for the thousands of years of history empires seem to be the big losers. Is that what you meant by big government? The United States certiainly fits that bill.

Posted by Anubis | Report as abusive
 

Ok Benny. Lets get serious.

If you are going to start repeating your ideas in every forum, at least try to find out if your idea is workable first.

Get your hands on some government and economic records. Crunch the numbers for your socialist experiment. See for yourself if it is workable.

Until you do that, you are wasting everyone’s time. Because as your idea stands, it can simply be dismissed because it doesn’t add up.

Posted by Anon | Report as abusive
 

Benny-
the trouble with your idea is that if everyone started getting checks from the government, a lot of them would quit their job. Who would continue to work full time if they didn’t have to? Then productivity would go down, and the GDP would go down.

Perpetual motion isn’t real, not even in economics.

 

I used this on another commentary and thought it appropriate here also.

It is obvious that between Doug Pelmear

http://www.toledoblade.com/apps/pbcs.dll  /article?AID=/20090530/BUSINESS03/90530 0338/0/BUSINESS02

and Johnathan Goodwin

http://www.fastcompany.com/magazine/120/ motorhead-messiah.html

both gas and diesel engines produced by Detroit have been in no way engineered to help the US and it citizens become oil independent. Detroit continues to cater to big oil to the detriment of our efforts to get off of foreign oil. The entrepreneurs above are making Detroit look ignorant and incompetent. This Administration should have let the Big Three fail and given the Bail Out money to visionaries like Pelmear and Goodwin. At least then you could have truly called the money “stimulus”. Only a fool would think that with all the engineers in the auto industry the only viable solution to the high cost of fuel and the reduction of emissions they could come up with was the “Hybrid”. No competing solutions; no competing technologies; while acting like the wall had been reached on the internal combustion engine and no further efficiencies could be achieved? Here is the evidence that they were either grossly incompetent or not honest with the American People.

Even the British are breaking away:

http://www.gizmag.com/tridents-200mph-10 0mpg-iceni-biodiesel-sports-car-nears-pr oduction/9928/

Notice the investment? UKP2.3M to get the car to production. For the Big Three this wouldn’t get it on paper much less to production. Obviously the cost of this vehicle is high but there are economies that could be taken advantage of to bring the cost into the range of the average US citizen.

I intend to circulate this information to every TV and Radio station and every news web site I can find in an attempt to get the word out while advising everyone I can to do the same and to not buy a car from any auto manufacturer that does not provide efficiencies comparable to what these guys get. We have already wasted billions of taxpayer money and I do not intend to waste another dime on an industry that has worked against this country and it people.

Now, Mr. President, what are YOU going to do about it? One thing I can think of is to create an Auto Industry Recovery and Innovation Czar. The two mentioned above would be very good candidates.

Posted by B.Free | Report as abusive
 

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