Opinion

The Great Debate

The uncharted waters of government ownership

June 10, 2009

lou-lataif– Louis E. Lataif, a former president of Ford Motors of Europe, is dean of the Boston University School of Management. The views expressed are his own. —

Government ownership of General Motors (60% U.S. and 12% Canada) will be fraught with difficulties.

Given the large taxpayer stake in the company, it will be impossible for elected officials to stay out of the fray. Congress inevitably will interject itself in business decisions affecting employment, the kind of vehicles the company builds, or the company’s position on nationalizing health care – just as it is now asserting itself on the question of dealership closures.

Imagine the new General Motors (i.e., the government) attempting collective bargaining with the United Auto Workers’ union (on whose behalf the government stepped into the fray in the first place).

Consider the company lobbying Washington on an issue favored by the government (e.g., tax policy or the elimination of secret ballots for workers) but ill-suited for the company. And there there’s the matter of types of vehicles to be built.

With a strong environmental agenda, the government will understandably favor alternative fuel vehicles. Yet, there is no company in the world making any real money on such vehicles, given the current economics of alternative propulsion methods.

The government points to Toyota as a car company that has been responsive to the need for small, fuel-efficient cars, but Toyota reported a first quarter loss much worse than that of General Motors. That’s because the vehicles that keep these businesses viable — larger cars, SUV’s and trucks — are not selling in sufficient volume during this consumer credit crunch.

If GM’s new owner find that the company’s products are not selling well (while competitor vehicles are selling better) it may decide to institute expensive purchase-incentive programs. When those programs are matched by the competition (which is what happens in normal competitive marketing), thereby eroding the profitability of the healthier competitors, where do those stronger companies go to complain about predatory pricing practices by their government-owned competitor?

I think the current approach to “saving General Motors” will prove untenable.

If the government truly believed that America needed to save its domestic auto industry, it would have been far wiser if the U.S. Treasury served simply as a lender of last resort. It then could have granted the ailing automakers interest-bearing bridge loans with restrictive covenants requiring sacrifices from management, the union, the bond-holders, and suppliers — and then let professional managers run the private businesses.

Then when the demand for automobiles rebounds (as it always does following a recession), the taxpayers would be the first to be repaid.

But by becoming an owner, a role for which government is singularly ill-suited, the federal government has taken us into difficult, uncharted economic waters — a market-damaging move I suspect we will regret. Hopefully, the Treasury realizes this and will work to find a swift way out of its ownership position.

Comments
7 comments so far | RSS Comments RSS

Don’t worry about the bargining between the new GM and the UAW. The US taxpayer should be worried about the tax for clunkers legisl;ation talk about another handout to the carmarkers at the expense of a ballooning deficit. No wonder the bond year is going up ! Why would forgien investors finance the US in upgrading the cars

Posted by gd | Report as abusive
 

In Canada there is a long history of crown corporations – companies owned by the government and whose debts are completely guaranteed by the government. Crown corporations made it possible for a relatively small country to implement mega-projects what would not normally attract investment dollars.

Decades ago and until this day, there has been a move to sell off crown corporations. It did not make sense for the government to directly compete against the private sector. So when the rationale for crown entities disappeared – when private investment dollars were present – the government sold off.

Using this model it would be hard to justify public ownership of automotive and financial companies – since there are other companies still present in these fields. The sale of some companies have worked out well and helped with deregulation. Obviously when the government has controlling interest, the market is not free.

There were also a number of events that made it necessary to sell off crown corporations – namely the emergence of high-risk situations. Being closely affiliated with nuclear companies for instance meant being liable for potential damages and losses. Similarly in terms of product recalls related to automotive deaths, I would expect lawsuits not just against the car companies but the U.S. government.

It’s hard to claim ownership and oversight over a company and then say somebody else is responsible when something goes wrong. Personally I think it would have been more appropriate for individual states to take a stake in industries, which is something they already do through pension funds.

It is extremely unorthodox for a federal entity to own car companies and financial institutions. But of course now fund manager in his right mind would invest in these companies. Both common shareholders and secured debt holders have no protection whatsoever under law. So more than the ownership, I consider the approach chosen by Mr. Obama highly disruptive to the free market.

Posted by Don | Report as abusive
 

You mean the same Government that cannot balance its own bugets and prevent internal corruption is also in charge of the nation’s auto, banking, and insurance giants?!?!

This is ridiculous. These steps being taken are surely moves towards facism. If you dont recogonize it, pay close attention the the dictorial powers current Treasury Secretary Tim G is seeking out over our industries and economy. Pay close attention to the moves being made to tax every single aspect of human life all in the name of creating a “green-revolution”. Youth brigades are being developed, FEMA “camps” are being built across the nation,

The globalist have always had thier way with the White House, with this Prez being the most charismatic puppet to date.

Posted by l_thetruth | Report as abusive
 

If General Motors was effectively managing its own affairs it would not have needed a government ‘bail out’. It is the height of hypocrisy for the ‘over the top’ salaried managers of GM to suggest, after they have been saved by a government bail out, to suggest it is a bad idea.

Posted by Rod Upward | Report as abusive
 

Tell them all I_thetruth. Fascism seeks empire. Empire requires war. “Truth is the first casualty of war”. One truth that is undeniable is the U.S. cannot produce the oil it needs to keep it’s economy going and and the oligarchs secure.

Posted by Anubis | Report as abusive
 

Anubus, you nailed in on the head!

Even though I believe we do have the reserves it is a moot point because it is all about keeping “the oligarchs secure”. Oil and Auto industries are Oligarchies and they have supported each other and lobbied congress for each other to secure their profits at our (the People’s) expense.

There is plenty of evidence that the internal combustion engine can be enhanced further to double the power while tripling the mileage. When the auto industry was put to task to come up with better ideas for fuel economy, not one but all seem to come up the same solution, the hybrid. What are the odds? How could all these “independent” manufacturers with all their engineers working independently all around the world come up with the same engineering solution? The People have been played! Oil is abundant. The lifting of that oil in the US has dropped over the last 10 years. Yet, Brazil has found oil deposits that will make them the new Middle East by 2015 and Cuba has found a huge deposit off it shores two year ago and is partnering with Russia to drill and lift the oil. The US has the Bakken oil reservoir which is the largest find since Saudi Arabia in 1939. USGS in 1999 estimated 400 billion barrels of recoverable oil. There is also Purdue Bay which is very oil rich. This does not mean that as a responsible citizen we should not desire our auto industry to produce the products that reduce our dependence on oil. Why should we guzzle it down when we do not have to? A side benefit is lower emissions. But, to build these cars would cut into the oil companies profits. And if there was real competition in the auto industry that would cut into profits also; more retooling and R&D costs. So, this oligarchy has to collude and try to keep the People from thinking about things like planned obsolescence and the lack of innovation over the last 100 years.

Then there is the government and those that lobby and donate to campaigns. They are not party loyal. They buy both sides in an effective strategy to maintain the status quo. When our system dictates that the business fail and other investors buy up (at bargain prices) the manufacturing plants and try to produce what The People desire our government subverts this process. Our bought and paid for government steps in and without asking The People bail out that business with billions of our (future) tax proceeds. So what do you think will happen now? I say We The People need to refrain from buying new cars and write or congressmen and tell them to stop the bail out of the auto industry. I personally will not give one more dime willingly to this industry until it produces vehicle that get three times the fuel economy while maintaining the power. Note this has already been done for both the diesel and the gas engines. Two individuals here in the US and one in the UK have developed internal combustion engines that get high horse power and very high mileage. I have already posted the links on other posts and only if someone wants will I post them again here. Google is very effective.

Posted by B.Free | Report as abusive
 

Smaller engines consume less fuel ergo , less emissions. Carbon dioxide is measured in percentage of exhaust flow rather than parts per million. There are currently no requirements for CO2 emissions on cars. Coal emissions are measured the same way with regards to CO2.

Oil has many more uses than just for fuel. Whether in abundance or scarcity conserving any resource extends use of said resource further in the future. The less activity in mining and drilling, the smaller the negative impact on the environment. Efforts to reclaim any harmed land would be less expensive as there would be fewer mining and drilling sights to mend when necessary. Viable forest and prairie are essential to maintaining a healthy underground water table. This is ever more important in the face of retreating glaciers which has already reduced the amount of potable water available in many regions of the world.

Lastly, there is no doubt that the planet is warming and most regions of the planet are experiencing climate change. The Western lifestyle of high fossil fuel consumption cannot continue. Geologic history shows us that continually rising CO2 leads to warming and mass extinctions. The particular event we are living in is happening at a hyper accelerated rate. Anthropogenic or not, man’s fossil fuel burning activity is at the very least adding significantly to this event.

Truly conservation must move forward rapidly. However we must also envision the future now and start building for it. Otherwise we will keep coming back to the same crisis’.

Posted by Anubis | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •