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.


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