Owners, not patrons

May 27, 2009

The government is poised to acquire ownership of 70% of General Motors, ostensibly in a move that will smooth out GM’s restructuring. As the Times reports:

The latest plan for the troubled automaker, which is expected to file for bankruptcy by Monday, calls for the Treasury Department to receive about 70 percent of a restructured G.M. Including the more than $20 billion that has already been spent to prop up G.M., the government will provide G.M. at least $50 billion to get the company through Chapter 11, people with direct knowledge of the situation said Tuesday. By some estimates in Detroit, tens of billions beyond that amount may be required. …

The prospect of a G.M. effectively owned by the government raises a number of thorny questions. Countless policy decisions — on matters such as fuel economy standards, tax incentives to replace aging cars and green technology initiatives — will present conflicting interests. …

Aides to President Obama have consistently said they would be reluctant shareholders, and they plan no operating role in the company.

“No one is going to put U.S. government employees on the G.M. board,” one person close to the ongoing discussions said on Tuesday.

The day-to-day running of the firm, this person said, would be left to professional managers, and the government would not be involved in decisions about closing factories, renegotiating contracts or selecting product lines.

There is a strong cultural obligation for the Obama administration to keep their hands off of business, even businesses in which the government would own a controlling stake. Not surprisingly, even with these reassurances there have followed the inevitable wisecracks about socialism and government-run enterprise. While American tolerance for most state-run businesses may be low, it is simply bad policy to rely on “professional managers” to bring GM back from capitalist Limbo. After all, GM has been in some form of restructuring for decades under the steering of “professional managers,” and has neither fully recovered from its market losses in the 20th century, nor successfully avoided collapse in this recession. How badly have “professional managers” mishandled GM? Consider this:

The automaking losses have put GM in the kind of financial position lately associated with dying airlines and retail chains. The company has been frantically seeking cash to meet its financial obligations. GM has sold stock and tapped credit markets to raise $5 billion in the past year alone, mostly to pay operating expenses. If the financial squeeze grows too tight, GM might even file for bankruptcy protection under Chapter 11 to force concessions in its wage, pension and benefit packages.

Thus wrote Time in 1992. Professional managers have not saved GM in the past, and it is odd to think they will do so in the future. Rather than the government merely becoming patrons of the same managerial cadre, it should carefully consider taking that dreaded active role, and finally changing the (faulty) way GM does business.

Advertisements

4 Responses to “Owners, not patrons”

  1. James Hanley Says:

    I wholeheartedly agree that professional managers have not saved GM. But that undeniable doesn’t demonstrate that government managers will be more capable. Given that professional managers had a greater incentive to save GM than government managers would have, it’s likely that the latter would do an even worse job than the professional managers did. For example, they are more likely to put policy goals ahead of financial ones, such as requiring the production of cars that have great political salience, but little commercial appeal. (And it’s worth pointing out that GM’s problem has not been selling cars–it’s sold plenty, evidencing sufficient commercial appeal–but in reducing their operating costs to the point where the market competitive price of their cars turns a profit.)

    I also agree that a company that accepts money from the government can’t plausibly beg for hands-off status. If you take the public money, you have to accept public interference (just like colleges that accept federal student aid must comply with non-discrimination requirements).

    But that begs the question of whether government intervention is even the right policy? There is no plausible argument for why GM must be saved, except to prevent temporary (albeit severe) dislocations. That was part of the argument when we saved Chrysler in the ’70s, but Chrysler has struggled ever since, and now it’s costing us more and creating more dislocation, which would not be occurring if we had let it fail then.

    Competitive markets have a solution for underperforming companies whose mangers can’t turn them around–going out of business and putting those resources, by definition under-productive resources, to more productive use.

  2. D.A. Ridgely Says:

    As the wisecracker of record here, let me echo Mr. Hanley’s response. First, I have no idea what “a strong cultural obligation” means, but I do have some sense of the history of state owned and operated industries and privately owned and operated industries, so mere “reassurances” from the Obama Administration are somewhat less than reassuring. (And they should be downright chilling to shareholders of Ford.)

    Second, sadly, my guess is that American tolerance for state run businesses isn’t nearly low enough, given the continued existence and consistently abysmal performance of Amtrak and the U.S. Postal Service.

    Finally, whether the phrase “professional managers” is being offset by genuine or merely scare quotes above, the question occurs what viable alternative to professional managers the author envisions?

    Amateur managers? Yes, that should work out well.

  3. grandmute Says:

    Hanley:

    There is, unfortunately, no competitive market into which, as into a wildlife preserve, struggling auto companies can be released. It is not self-evident that for GM to go out of business would be efficient or optimal: GM’s (and Chrysler’s) bankruptcy would occur across multiple markets, some oligopolistic, others monopsonistic, but none perfectly competitive. Hence, it is inappropriate to treat the death of GM as one seller of widgets being edged out by others in a perfectly competitive market. So if we don’t know for sure that letting GM fail is efficient, some sort of restructuring would probably be a safe bet.

    Ridgley:

    You answered your first point with your second, so with your permission I’ll skip to the third. Professional managers are loosely united by their profession – what they ostensibly learn in B-school and absorb from colleagues – but they have no monopoly over the skills of good management. Given past failures of domestic carmakers, perhaps it is time to put other professionals – engineers and accountants come to mind – in positions of greater managerial power. So, technically, these managers would also be professionals, but not professional managers baptized in an MBA program.

  4. James Hanley Says:

    Mr. Grandmute [for lack of knowing your real name;)],

    Thank you for your cordial response. I greatly enjoy such thoughtful and collegial discussions.

    I disagree with one point in your response and agree with another.

    I disagree that there is no competitive auto industry. Indeed the opening up of the auto industry to imports, which made it more competitive than it was under protection, is what led to GM’s inability to prosper. That is competition operating as it ought. In fact it is often said that if no businesses fail, then the market is not operating properly.

    I do agree, however, that engineers often make better managers than MBAs. I’m less sure about accountants. In my experience accountants tend not to understand the concept of investing for growth–they’re too worried about current cash flow. But it’s hard to argue they would have done worse than the current managers.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: