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The Taboo Against Government Intervention

Following in Chrysler's wake, GM seems to be on the fast track toward a successful bankruptcy exit -- "successful," that is, in the sense that GM and the Treasury Department get what they wanted, and the company does not melt down into liquid. (One remaining hurdle is the appeal lodged by Steve Jakubowski of bankruptcy blogging fame, which seeks to force the "New GM" to accept liability for injuries already suffered by people due to GM cars.)

Predictably, of course, the government is repeating that it has no intention to intervene in the operations of GM, despite its 61% ownership share. Here's the way the issue is framed in the Post story:

The Obama administration has repeatedly said that it does not want to run GM and that it planned to sell its government stake next year. But analysts questioned whether the administration would try to influence the business, especially after a Wall Street Journal article yesterday reported that top Tennessee officials were recently told that GM would consider "community impact" and "carbon footprint" in weighing whether to build compact cars in the state or in Michigan. Ultimately GM chose Orion Township, Mich., located just 35 miles from GM's corporate headquarters.
"If Washington owns it, it just can't keep its hands off," said Sen. Lamar Alexander (R-Tenn.) in an interview yesterday.

(Tennessee, I believe, has an enviable record of attracting factories through tax breaks and other targeted government policies, but no matter.)

The economic logic behind skepticism about government intervention is sound. The purpose of a free-market system is to allocate resources in the most efficient way possible, which means that, for example, companies' decisions about where to build factories and what cars to build should be determined solely by market forces. Even if you believe there is a valid role for government in the economy, according to this line of thinking, government should intervene in as clean and simple a way as possible. For example, even if you support policies that favor fuel-efficient cars, instead of having government "bureaucrats" (how come a middle manager with no individual profit motive is a "bureaucrat" if he is employed by the government but just a "middle manager" if he works for a corporation?) review and pick models to build, the government should use less intrusive means such as CAFE standards or a gasoline tax.

This argument makes sense, but it suffers from at least one serious flaw: It is predicated on the assumption that the government will be able to go ahead and implement those ideal, "clean and simple," technocratic policies. However, it should be clear to everyone by this point that even an administration with a battery of smart economists and policy wonks and relatively large majorities (by recent standards) in both houses of Congress cannot simply dictate sensible policies; while we're discussing taxes on fossil fuels, look at the misshapen sausage known as Waxman-Markey (which, for the record, I would vote for if I could).

In the real world, if you are a democratically elected and relatively popular president, and Congress is doing a mediocre job passing the legislation that you honestly believe is crucial to the future of the country, why shouldn't you use your 61% ownership of GM to pursue important policy goals, such as increased fuel efficiency? (Pause to allow readers to compose flaming comments.) Sure, it's not the perfect solution that Cass Sunstein would have designed, but it's a solution.

I think there are two main valid objections to this line of thinking. The first is that this type of intervention would result in an inefficient allocation of resources - for example, building too many fuel-efficient cars for a market that doesn't want them. (The quick answer is that you just lower the price to the point where the market does want them, but it's still a valid objection.) However, this is really an issue of degree. Companies that make capital-intensive products are always making guesses about where they think the market will be in several years' time; GM decided to build the Chevy Volt long before it started taking government money. And those guesses help to shape markets. At my company, seven years ago, we guessed that lots of insurance companies would pay money for better claims systems; because we made that guess, the market for new claims systems is now a lot bigger than it would have been otherwise. Maybe private companies are better at making these sorts of guesses than the government, but it doesn't seem unreasonable to me for President Obama to say, "I want you to be among the top X manufacturers of fuel-efficient vehicles by 2015, and I'm willing to lose $Y dollars to get there, because I think it's in the national interest."

The second objection is that companies that are managed toward policy objectives rather than profit objectives will become politicized and internally inefficient. For example, if you are willing to absorb losses for some period of time to serve the national interest, this will create a different kind of culture within the company - one where managers care more about conforming to political interests than about making money. Again, I think this is a valid point, but it's a question of degree. First, the link between the profit motive and the behavior of most people inside a large corporation is a tenuous one at best, as anyone who has actually seen the inside of a Fortune 500 company can attest. Second, major sectors of our economy, such as defense contracting, are run in only very distant approximations of the profit motive, but we accept that as justified by the particular circumstances. Third, the solution is to set high-level objectives for GM - for example, "I want you to be in the top X manufacturers of fuel-efficient vehicles by 2015, without losing more than $Y billion per year in the process" - and give managers financial incentives to achieve those targets. That would do roughly as good a job at encouraging internal efficiency as the current shareholder governance structure.

For both of these reasons, I think that government intervention has serious costs and risks. But where I seem to differ from most people is that I think those costs and risks need to be balanced against all the other costs and risks we face in the economic sphere. We need to bear in mind that the private sector we have is nothing like the perfect competitive market of economics textbooks, and we also need to bear in mind that the alternative to a flawed policy is often not a perfect policy, but no policy at all. In certain circumstances, government economic intervention can be an appropriate policy tool. And it would be better if the Obama administration could assess that tool rationally, instead of having to ritually chant "government intervention is bad" every time the issue arises. But perhaps that is where our political discourse is today.

By James Kwak  |  July 7, 2009; 11:11 AM ET
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I'd say a vote with a dollar is the best way to determine what people want and a far better way to go than a vote in the voting booth. Isn't that what America is all about, what people want rather than what is good for them? There may be far too many fat people on the street but their fatness is testimony to their (and my) freedom to choose.

The reason that we made a mess of things in recent times is that money has been way to easy to obtain so the considerations behind the "dollar vote" have been severely distorted.

If money is falling freely from the easy-credit tree, then it will be used wastefully and extravagantly, giving a strong yes vote to bizarre things such as the huge SUV and the monster house.

But, we are now on our way back to a world where spending a dollar is cause for careful consideration (just look at the savings rate these days).

The worst thing we could do is to believe that what has happened recently is a reason to favor government control rather than free-market operation. I think the government move to raise gas mileage and determine what kind of vehicles are marketed is going to end up a big mess.

It is cheap money (too easy credit) that will undo us every time. Wise decisions are made with money only when there is a real appreciation of the dollar as a vote for one thing and not another and pain when that vote is wrongly made.

Unlike the government that is wont to step deeper and deeper into debt because it "must" take this and that costly measure, with no such thing as bankruptcy for the U.S. Treasury, the private market doesn't allow bottomless debt and a choice really must be a considered one with an associated risk IF money is tight.

Posted by: Clif | July 7, 2009 1:50 PM | Report abuse

Why is a vote with a dollar better than a vote in an election? We celebrate July 4 because patriots were ready to die for a democratic vote in an election. We remember the Magna Carta for the same reason. "Free markets" without the vote reminds me Chilean and Argentinian torture chambers and the rape of Russia and Poland not so long ago.

Posted by: charliecoop | July 9, 2009 9:36 AM | Report abuse






Posted by: bamvol | July 12, 2009 11:19 AM | Report abuse

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