What's So Bad About Government Intervention?
As the federal government dives headlong into one of the most massive interventions into the private sector in decades - the restructuring of GM through bankruptcy, which will leave the government with a 60 percent ownership stake in the company - everyone seems convinced that government involvement is a bad thing.
Even its advocates and architects consider it only the least among evils: President Obama said, "We are acting as reluctant shareholders, because that is the only way to help GM succeed. What we are not doing -- what I have no interest in doing -- is running GM," and promised the government would "refrain from exercising its rights as a shareholder." In part this is an attempt to deflect criticism from the opposition, which is surely ecstatic to actually have something that looks vaguely like socialism to complain about; remember, they made do with much less in calling Obama a socialist during the campaign. But all appearances suggest that Obama and his entire economic team truly believe that government intervention is necessarily bad.
I know the theoretical arguments for why government intervention is bad - the profit motive is necessary to ensure efficient allocation of resources, government ownership leads to politicization of business decisions, etc. - and they make sense. But we do not live in a theoretical world, and in the real world government intervention is just one policy option among others, that should be considered on the merits.
The most common argument against intervention is that the government is bad at running companies in general, and doesn't know anything about auto companies in particular. This may be true, but it misconstrues the role of shareholders in running large companies. A large proportion of the stock of any large company such as GM is in the hands of individual investors, most of whom know little about running an auto company; the rest is in the hands of institutional investors, most of whom also know little about running an auto company. The job of the shareholders is to elect and oversee the board of directors, and their job is to select and oversee the actual management of the company. The important thing is that the managers know how to run an auto company, and that the board know enough to know if the managers are doing a good job.
In this case, the government amassed its position by lending GM more money than anyone else, and at a time when no one else would lend money. It's common practice for loans to be converted into equity in bankruptcy, and for the biggest creditor to emerge with a controlling share of the equity. What we need now is for the government to use that equity to appoint a good board of directors. If we don't feel the government is up to that task, it has a couple of options. First, it could simply decide not to vote, and let the remaining shareholders elect the board. Second, it could place its shares in a voting trust, appoint a few highly respected trustees, and charge them with voting the shares in a way that maximizes benefits to the taxpayer.
Another argument is that government intervention exposes GM to political motivations, instead of the pure profit motive. For example, Planet Money raised the idea that managing a company for anything other than profit may be illegal. In general, it's not true that a company has to be run solely according to the profit motive. If I own a company outright, I can run it any way I want. Even when a company has multiple shareholders, it is allowed to do things that have only the most tangential relationship to profitability, such as donating money to charities. However, there are cases in which a court has ruled that a majority shareholder cannot run a company while completely ignoring the profit motive, because this hurts minority shareholders.
More generally, though, the concern is that the government may seek to have GM pursue objectives that a purely profit-maximizing company would not pursue, and this will lead to inefficient outcomes. For example, the government has already promised Fiat an additional ownership slice in Chrysler if it comes out with a car that gets 40 miles per gallon. In theory, the profit motive ensures that the socially optimal amount of investment is made in various investment possibilities; if the government is providing non-market incentives for Chrysler to build a certain type of car, that's a bad thing.
Well, maybe. Market incentives ignore externalities, such as the fact that gas guzzlers are bad for society in all sorts of ways (toxic air pollutants, greenhouse gases, geopolitics, etc.). The market, on its own, will produce more gas guzzlers and fewer small cars than is socially optimal. The government is supposed to represent the public interest; if it wants to use its ownership position to influence a company to do things that are in the public interest - like building more fuel-efficient cars - then I have no problem with that.
This is not to say that there are no risks with government ownership. There is the risk of political meddling, where various politicians put pressure on companies to advance their personal interests, or the personal interests of their constituents. There is the risk that, in order to achieve political objectives (like preserving jobs), the government continues sinking money into the car companies - money that would do a better job of creating jobs elsewhere in the economy. As a result, government positions in private companies need to be managed according to clear rules and with a high degree of transparency.
But I don't think we need to accept that a role for government is evil, even a lesser evil, or that it is somehow antithetical to the proper functioning of the economy. Many people have pointed out that the current crisis demonstrates the downside of unbridled capitalism. It's surprising that so many people - all the way up to our president - persist in claiming that unbridled capitalism is nevertheless the optimal form of economic organization.
Posted by: ReneeinCA | June 1, 2009 5:26 PM | Report abuse
Posted by: wmartin46 | June 1, 2009 5:45 PM | Report abuse
Posted by: GordonShumway | June 1, 2009 5:53 PM | Report abuse
Posted by: jratliff1 | June 1, 2009 5:59 PM | Report abuse
Posted by: DwightCollins | June 1, 2009 6:36 PM | Report abuse
Posted by: Clio1 | June 1, 2009 6:48 PM | Report abuse
Posted by: tomtildrum | June 1, 2009 6:56 PM | Report abuse
Posted by: scottbwilliams | June 1, 2009 7:00 PM | Report abuse
Posted by: dnjake | June 1, 2009 7:00 PM | Report abuse
Posted by: wmartin46 | June 1, 2009 7:03 PM | Report abuse
Posted by: dudh | June 1, 2009 7:16 PM | Report abuse
Posted by: kl305 | June 1, 2009 7:16 PM | Report abuse
Posted by: borntoraisehogs | June 1, 2009 7:18 PM | Report abuse
Posted by: wdrudman | June 1, 2009 7:23 PM | Report abuse
Posted by: wdrudman | June 1, 2009 7:30 PM | Report abuse
Posted by: tomguy1 | June 1, 2009 7:35 PM | Report abuse
Posted by: wmartin46 | June 1, 2009 7:41 PM | Report abuse
Posted by: neel1 | June 1, 2009 7:41 PM | Report abuse
Posted by: Vercinget333 | June 1, 2009 7:42 PM | Report abuse
Posted by: Vercinget333 | June 1, 2009 7:48 PM | Report abuse
Posted by: Vercinget333 | June 1, 2009 7:53 PM | Report abuse
Posted by: antisocialist | June 1, 2009 7:54 PM | Report abuse
Posted by: rogerjan | June 1, 2009 7:56 PM | Report abuse
Posted by: furtdw | June 1, 2009 7:59 PM | Report abuse
Posted by: Vercinget333 | June 1, 2009 8:02 PM | Report abuse
Posted by: EarlC | June 1, 2009 8:05 PM | Report abuse
Posted by: Curmudgeon10 | June 1, 2009 8:10 PM | Report abuse
Posted by: anti1 | June 1, 2009 8:12 PM | Report abuse
Posted by: VirginiaConservative | June 1, 2009 8:20 PM | Report abuse
Posted by: wmartin46 | June 1, 2009 8:27 PM | Report abuse
Posted by: whiteja55801 | June 1, 2009 8:46 PM | Report abuse
Posted by: btmryan | June 1, 2009 8:48 PM | Report abuse
Posted by: jchenn | June 1, 2009 8:58 PM | Report abuse
Posted by: Ombudsman1 | June 1, 2009 9:00 PM | Report abuse
Posted by: ssmorehouse | June 1, 2009 9:22 PM | Report abuse
Posted by: Bushlegacylies | June 1, 2009 10:01 PM | Report abuse
The comments to this entry are closed.