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.

76 comments

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If memory serves, in the 1970s the British government fashioned British Leyland which was the State controlled holding company of many of Britain’s auto manufacturers. It was a miserable failure. We again are not learning from the mistakes of the British. Product quality was terrible and productivity mediocre at best. Jaguar Cars Limited was the only profitable venture keeping the other manufacturers doors open. More to our woes, Jaguar exported 80 per cent of it’s cars accounting for its profits. No American auto maker is that successful now.

The notion of State run industries is not new. There is a history of this same approach in Fascist Italy and National Socialist Germany in the 1930s. All of this was done to jump start manufacturing idled by the Great Depression and Treaty of Versaille. Unemployment had brought abject poverty and starvation.

There is far more to be concerned with than merely the economic tangible of State ownership of industries. While socialism is considered a left leaning form of government and Fascism to the right, history has proved George Washington correct. In times of crisis the natural tendency of people is to invest too much power in one man and his administrators. And I quote “Where in one the instance this might be the vehicle for good, it is the customary weapon by which free governments are destroyed”. Germany and Italy of the 1930s are are testament to the claim.

Our Congress has become a rubber stamp for whatever our any of our Presidents will is regarding matters of war , finance and industry. This should be cause for concern for us all. At some point we are all going to have read the Constitution (very quick read) for ourselves and decide whether or not we are going to make our leaders uphold Constitutional law. As for now they clearly are not.

Posted by Anubis | Report as abusive

Is that what Margaret Thatcher was talking about in 1987:

I think we have gone through a period when too many children and people have been given to understand “I have a problem, it is the Government’s job to cope with it!” or “I have a problem, I will go and get a grant to cope with it!” “I am homeless, the Government must house me!” and so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first. It is our duty to look after ourselves and then also to help look after our neighbour and life is a reciprocal business and people have got the entitlements too much in mind without the obligations…

Posted by P Singh | Report as abusive

I suppose all those against public financing of the US auto sector were also against public financing of the US banking sector. Now how many thousands of billions of taxpayers money is that costing? Is it OK to finance Wall Street fat cats, but not OK to finance the auto industry?

Posted by vldr | Report as abusive

whatever happens to GM now and the future, I would not buy any GM product because of the bad news it got during the last several months. Its over GM, accept it!
It will just be a waste of money! There are a whole lot of brilliant, excellent superb quality cars available now. Its too late for GM. They still are at least 50 yrs behind in everything. It would be more logical and sensible to
just break down the whole thing and start all over again at least w/ a new name.

Posted by Ben Hern | Report as abusive

Amen, Anubis. That’s all that needs to be said.

Posted by Willy | Report as abusive

Any of you ever own a Yugo?
It was cheap, got good mileage, usually because it was pushed or towed more than it was running. It was also the product of a state run auto manufacturer.
Rather than have an American car company’s build cars with the same performance as the Yugo, the nation would be served better to allow GM and Chrysler to fail and allow new companies to emerge that can build a better car at an affordable price.

Posted by Craig Coal | Report as abusive

Jaguar?? Good car?? you’ve got you parties muddled. Jaguar was horrible. Yugo’s??? believe it or not they were a very reliable car. In fact there are several still on the road. The brief ownership of these companies (GM) by the government doesn’t mean it will be fully run by the government. In these trying economic times the government is the only one willing to give them money. They are trying to save jobs and two american icons. Due to free trade, toyota, honda ,hyunda all allow there vehicles to be “assemblied” here. Which may employ a few thousand people but these plants were built with more automation than our big three. I’m not defending them, yes they need to get smart with conducting business but they employ a lot of people. As far as a new company rising from the failure, it will never happen. This isn’t the 80′s. When Chrysler failed they took government money and Lee Iacocca turned it around to a money making company. I wouldn’t say the K-car was reliable but he made a cheap and affordable vehicle that actually got decent gas mileage. The same is happening today except the government is fronting all the money. Lets step back and also look and how volatile gas prices are here. Europe has mostly stabilized the cost of fuel. The U.S. needs to strip away some state taxes and allow them to place a fuel tax that can help stabilize the price. Its easy to say let them fail, but would you want to be one of the thousands of families who depend on a job there?

Posted by bill | Report as abusive

GREAT COMMENT by Anubis. When a government disregards the law, it is lawless. When the judiciary collaborates with the lawless government, it is discredited. Preferential treatment of the UAW over others should be troubling to every citizen. In regard to the prior comment, it is absolutely true that both the German and Italian fascist governments were each elected, each leader made up the law as they went along, were supported by their congress and therefore neither did anything during the war that was illegal — indeed, the customary weapon by which FREE governments are destroyed.

Posted by Ner Vus | Report as abusive

I’m just wondering how Mr. Pethokoukis feels about the administration favoring political allies over the rule of law and market principals when applied to the Wall St. bailouts?

Bullying creditors? Please. In the case of Chrysler, Cerebus, a private entity, saw the books and bought anyway. Why weren’t they held responsible for the debt? If I buy a small business, I get it all. Good and bad. Perhaps it’s political connection?

This is no longer a representative republic. We are an oligarchy. In that light, it all makes perfect sense. The privlileged and connected thrive while the rest of us strive!!!

Posted by Ted | Report as abusive

Seems like the last time these economically-savvy auto gurus ran the country, we wound up in Vietnam. And David Halberstam made a million writing books about “The Best and the Brightest.” Are we heading that way again–with a group that “knows best” and with the best of intentions almost ruins us?

Posted by David Lough | Report as abusive

There was another article here on The Great Debate about the auto plant wars, check it out if you haven’t:

http://blogs.reuters.com/great-debate/?p =3688

Now that govt will own 70% of GM will the battle shift from union vs. management to (union+management) vs. govt? How quickly do you think those two (union leaders and corporate heads) can go through the all cash? Eh.. :( tragedy of the commons, always relevant…

Posted by Andrew | Report as abusive

For some reason, when it comes to auto companies, everybody and their brother is an expert. But when it comes to banks, we defer to the Greenspans and Geithners of the world. Maybe it is because we (almost) all drive cars, so we think we’re experts on car companies.

Why the double standard between the auto companies and the banks? Why not let banks fail too? The same argument could be applied there. In fact, it is probably more important to let new, smaller banks emerge who will build a more diverse financial ecology that is less susceptible to self-styled masters of the universe.

I know, financial institutions’ impact on the economy, etc., etc. But that’s precisely my point: the auto companies have a big impact on the economy. They are one of the few industries left in the United States where we actually make something tangible that adds to the GDP rather than selling each other credit default swaps.

Also, let’s disabuse ourselves of the notion that the government will be running these companies. It won’t. It will temporarily be the major stockholder while the company is going through bankruptcy, but Obama has no interest in running the auto companies. He has enough to worry about. The government will want to sell the stock as soon as feasible.

If the government had taken a stake in the banks rather than just giving them money, at least the taxpayers would have a return on their investment. As it is, we pour money into banks, who actually caused this crisis, when they threaten to destroy the economy, but when they succeed, all the bankers and stockholders get to take home the profits and the taxpayer is left with next to nothing. Why is that?

And guess who has a major stake in some of the foreign auto companies that are most touted as exemplars of all that is good? The governments of those respective countries. Do you think the Chinese government has nothing to do with the Chinese companies vying to enter the US market? Do you think the Japanese and European companies have received no aid from their governments over the years and recently?

Posted by LiveLong&Prosper | Report as abusive

It is likely that the losses the government and the public have sufered through GM in the past through unseen subsidies – over-risky GMAC loans hurting the economy, inefficient cars pushing up gasoline consumption, air polution and public health costs, GM vehicles creating greater wear-and-tear on publicly-built highways than lighter foreign-made vehicles, failure of GM to invest in “green” and public transit vehicles, etc. – dwarf the present bailout costs. IF these unseen subsidies can be controlled while still maintaining GM as a major employer by giving the government and the employees a controlling interest in deciding the company’s direction, the bailout is well-invested. The investment would realy not be in the old GM but in a new company with priorities more in line with the inteests of the taxpayers who have been subsidizing GM for many years.

Posted by Nicholas Arguimbau | Report as abusive

“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?”
_____________________________
The government always can resort to its heavy weapon – tax. Just slap another $2/gallon of federal tax, and we are right there over $4. But who will bear the brunt of this assault?
Sure not the well-off folks. Whoever could buy a Mercedes will neither hesitate to fill it up nor trade it for that hypothetical Government Motors (still GM – they can keep the old logo :-) ) – produced fuel sipper.
Not the plumbing/roofing/landscaping/whatever contractors driving gas guzzling trucks/vans. They can’t have their tools of trade fit in a compact, but they can pass the fuel cost on to the customers.
But the poor will be definitely hit. They can’t buy these shiny new fuel sippers due to lack of either cash or credit. There’s not that many used small cars available due to both past car buying habits and the fact that larger vehicles usually better survive years of use and abuse. Motorbikes as a mode of transportation are not that bad in India and other warm places, but here we have real winter.
The hardest hit will be minivan moms. There’s no way you’ll fit 2 kids in their child seats, a stroller for younger one, and a bike for older one in a compact. My Volvo V70 wagon is barely enough. And if more than 2 kids – forget it, only a minivan would do. There’s no way to make fuel sipping minivan – its size and weight need energy to move around, and even filibuster-proof majority in Senate will not enable BHO to change the laws of physics. If every trip to the playground will be a hit to the wallet, guess how many of these moms would vote for incumbent politicians come next elections?
And I’m not even speaking about the effect of any new taxes on overall economy that is already deep in recession.

Posted by Anonymous | Report as abusive

Anubis, spot on. Also, in reference to Jaguar, production remained based in the UK. Not so with GM. GM’s most lucrative market is Asia. Cheaper labor, higher profit margin, and they actually view GM as a semi-luxury company (WTF?!?). We are merely keeping the company afloat until they can wrangle their way out of North America, and then ship cars to us in pieces while still probably calling themselves an “American Revolution”. I wonder how UAW auto workers will feel about gluing the trim on a Daewoo.

I think I am finally catching on to what Sprok meant when he said “the buck stops here.” We will soon be paying for things with hope, the new currency. Too bad…all of my savings are in $bucks$.

Posted by Patrick | Report as abusive

Good article. Clearly Obama thinks he can just spend the US out of this current recession (depression likely to come) as he simply does not understand basic economics. The world is no longer US centred. This is not like before where the US had a trade surplus and a positive savings rate (now positive for the last few months) so it could borrow and spend. This $1.85trl deficit for 2009 means that the US has to borrow or print $5bn a day! It is unbelievable and will probably get much worse. The US needs to face up to its debt reliant economic model before it is too late. Supporting GM, Chrysler, AIG etc is not the way forward. The Bond market will not accept this.

He is the wrong man at the wrong time.

Posted by D Rumsfeld | Report as abusive

Hearing arguments about ‘saving jobs, they employ a lot of people, etc’ made me think of the following:

aren’t people being reliant a bit much on The Job, sort of like other people are being reliant a bit much on the government? Jobs come and go, and worker should be able to do so too. If the jobs leave town, follow them. If the jobs are gone for good, make a new one – start a small business, with the advent of the internet it has never been easier. You want manufacturing? – buy an old lathe or a mill and start making and selling small parts on your website. People should not lock themselves into one job for their lifetime, the world is a dynamic place.

Posted by Andrew | Report as abusive

I hope all those decrying the expansion of government never voted for George W. Bush or the GOP congress of the last 8 years. They presided over the largest expansion of government since FDR. They also set the house on fire, and now Obama is being criticized for spending money on water and a fire department to put it out. In the past four months, the GOP got religion (figuratively) and now talks in very serious tones about the need for fiscal responsibility.

I also hope all those being holier-than-thou about the evil auto industry don’t drive to work, especially in California where the average commute time is 35 minutes. If you don’t like the auto industry, put your money where your mouth is and take public transport.

Posted by Spock | Report as abusive

well first off Obama is not part Vulcan and he is not from outer-space. As far as mixed races, most of us here in America are multi-racial. Our skin may not be the color that many want it to be when we say that but being part French and part Russian is just as multi-racial as being part African and part Irish. Difference is the skin color outcome will likely result in a lighter shade for the first multi-racial make-up and a darker shade for the second multi-racial make-up above. But skin color is not race. Race is the tribal origins of a people or “a group of persons related by common descent or heredity”. So if you are comparing multi-racial backgrounds then most people in America are like Spock in that sense.

But when you compare a person that should be judged on his actions to those of a fictional character’s actions, a character who is known for his behavior, then the behavior is what should be compared not racial make-ups.

Obama lies in general, Obama also lies in making false promises to people regarding things he has no idea how to secure, Obama manipulates to advance his career, Obama is either a hate-filled racist or has decided in the past to hang around with hate-filled racists and make promises to them for votes in order to also advance his career within his local community, Obama has in the past co-horted and worked as “community organizer” primarily just to represent and advance people who share his shade of skin color while calling it “helping the poor” (last time I checked poor came in all colors, genders, and races and poor is not something exclusive to one shade of skin color. Call it what it really is, helping people of your own shade of skin color not helping the poor).

Spock doesn’t lie, spock doesn’t promise people things he has no idea how to obtain, spock doesn’t manipulate in order to advance his career, spock isn’t a hate-filled racist and/or doesn’t support them in order to advance his career or get votes, spock doesn’t work to organize people to primarily advance people who share his shade of skin color…

There are no more unique similarities between Spock and Obama than there are between comparing Spock to most other people in the America.

Comparing Spock to Obama is an GREAT INSULT to Spock’s story.

Posted by CJ | Report as abusive

Yes, the government bailed out the banks and Wall Street, and we will find out soon enough that it is a big mistake.
How does this justify the bailing out of the auto industry?
Because we make one mistake are we now bound to make more?
Or would it be far wiser to learn from past mistakes and move forward with prudence. The government is spending trillions of dollars to “save the economy” and justify it by saying they are saving jobs. Then they admit that the economy will continue to lose jobs for some time to come.
During the Great Depression the people were told that they just had to let the government do its thing and prosperity is just around the corner. Prosperity finally came ten years later when America united together in a common cause. It is my hope that we can find a common cause that will get Americans to work together once again without having to fight another world war or continuing to line the pockets of politicians and the lobbing groups that support them.

Posted by Craig Coal | Report as abusive