If you are an owner, an investor, a supplier, or an employee of General Motors Corp., I am willing to bet that you are now sorry that GM was not forced into Chapter 11 bankruptcy proceedings when its dire financial straits first made headlines months ago. You probably regret even more that it accepted tens of billions of dollars in bailout money from the federal government, providing the company with a taxpayer-financed capital infusion that only delayed the inevitable and predictably came with onerous bureaucratic strings attached.
Years of mismanagement, reinforced by lavish compensation for its unionized workforce and by national fuel economy standards that oblige US automakers to produce vehicles that few consumers want to buy as long as gas remains cheap, raised GM’s production costs to levels unsustainable in a globally competitive marketplace. Rather than making the tough decisions that could have restored profitability if implemented in time, company executives fiddled while a great American business enterprise burned.
Proving that one should be careful about what one asks for, GM’s top management went to Washington with tin cup in hand, first by private jet and then, after a firestorm of popular condemnation, by eco-friendly car. The pitiable spectacle of GM executives begging Congress for financial assistance represented a major reversal of fortune for a company that was once the world’s largest manufacturer. During the 1950s and 1960s, prior to being challenged seriously by foreign competitors and fearing that the U.S. Department of Justice would accuse it of unlawfully monopolizing domestic auto sales, GM purposely kept its prices high and bypassed other profit opportunities to keep its market share from exceeding 55 percent.
GM’s management got most of what it asked for-and more than it bargained for. In return for “temporary” loans and other forms of taxpayer “investment,” such as purchases of preferred stock, the federal government essentially took control of the company and began calling the shots. The first shoe dropped when CEO Rick Wagoner was forced out and replaced by the Obama administration’s fair-haired boy, Fritz Henderson. In so doing, bureaucrats assumed responsibility for a business decision that should have been delegated to GM’s board of directors. Washington has also imposed limits on executive compensation at the “new” General Motors, a function that in privately owned companies likewise falls, by majority vote, on the shoulders of the members of the board.
More recently we have learned that President Obama’s “car czar,” Steven Rattner, has proposed micromanaging GM’s product line. Arguing that the company’s Chevrolet division markets the very same vehicles, Mr. Rattner may substitute his judgment for that of consumers by ordering that GM stop producing SUVs and trucks carrying the GMC nameplate.
Not too surprisingly, following the embarrassments associated with revelations of income tax avoidance by Treasury Secretary Tim Geithner and former Health and Human Services Secretary designee Tom Daschle, the car czar himself may be implicated in the Quadrangle Group’s “pay-to-play” kickback schemes, currently under investigation by New York’s attorney general.
An investor in a privately owned company who thinks that management means taking the business in a direction that will compromise its long-term profitability can sell out, even if at a capital loss, and avoid further reductions in wealth. The taxpayers who now “own” General Motors have no such option. They are stuck with the consequences of federal government control. Perhaps the car czar-or his successor-can resurrect GM and create a leaner company able to compete effectively in a brave new automobile world that survives the current economic downturn.
But any American who visited a post office recently and dealt with the long lines, rising postage, threat of reduced delivery, and overall poor service will not be so naive. It would have been far better to reconfigure GM under an orderly bankruptcy process, subject to the rule of law, than to hand its administration to bureaucrats, whose discretionary powers are more vulnerable to political influence than to the wishes of either consumers or the company’s many “stakeholders.”
In the operation of a robust private economy, the freedom to fail is just as important as the freedom to succeed. If GM cannot survive without handouts, painful as it might be, it should hit the road.
William F. Shughart II, a Senior Fellow of The Independent Institute, is F. A. P. Barnard Distinguished Professor of Economics at the University of Mississippi.