The threat of political meddling in GM

President Obama and his economic team are obviously deeply ambivalent about their decisions to acquire control of major corporations like GM. They have repeatedly insisted that they will limit their involvement in management decisions and seek to liquidate the government's stakes in these companies as soon as possible.

For instance, here's what President Obama said today about government influence on the management of GM:

What we are not doing -- what I have no interest in doing -- is running GM. GM will be run by a private board of directors and management team with a track record in American manufacturing that reflects a commitment to innovation and quality. They -- and not the government -- will call the shots and make the decisions about how to turn this company around. The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions. When a difficult decision has to be made on matters like where to open a new plant or what type of new car to make, the new GM, not the United States government, will make that decision.

In short, our goal is to get GM back on its feet, take a hands-off approach, and get out quickly.

The problem, however, is that the federal government can influence management decisions concerning plant locations, fuel efficiency of new models, etc., even if Obama claims that it will not do so. As a result, members of Congress are already lobbying to influence those decisions. Even when the administration does not weigh in directly, the management of GM will be forced to consider what issues might draw political attention and adjust its strategy accordingly.

The Wall Street Journal reports that "President Barack Obama and his aides say they will shield GM from outside pressure," but this approach is unlikely to work when tough choices have to be made. The administration has already taken the most important steps necessary to give the company a chance to succeed by reducing its debt and pension burdens and infusing new capital into the company. Shouldn't the government now bind itself to the mast and directly forswear intervention in the company's decisions? For instance, after voting for a new board of directors, the Obama administration could transfer control of the government's shares to a Federal Reserve-type board of independent experts. This step would free the administration of de facto responsibility for GM's decisions and insulate the President from any resulting fallout. By contrast, political meddling is likely to hinder the company's efforts to return to profitability, which would in turn harm the administration and the country.

Update 6/2 9:47 AM: Here's a bad sign from the Detroit News (via the WSJ):

[Detroit Mayor Dave] Bing, who said he feels bad for the thousands of people who will lose their jobs at the company that sought bankruptcy protection in federal court today, said he received a call Sunday night from Obama "informing me of his support for GM to stay in the city of Detroit with its headquarters at the Renaissance (Center)."

Surely the company's headquarters location is not one of the "most fundamental corporate decisions." I'm sure it is tempting to exploit the government's control for political purposes in this way, but in the long term the administration is only hurting itself. If GM doesn't return to profitability quickly, the government will be forced to hold its stake in the company longer, make less money (or lose more), and potentially could even be forced to contribute additional funds to keep the company afloat. It's a lose-lose.

Update 6/2 2:01 PM: Matthew Yglesias notes that there's no way for the administration to fully bind its hands:

This might be a good idea. But it’s worth emphasizing that even this doesn’t really solve the problem. The Fed’s independence, after all, is in many ways nominal. There’s nothing stopping congress from changing the laws that govern the Fed—including the provisions making it “independent.” Thus, in principle, a Fed chair can be swayed by informal political pressure. The reason the Fed is independent in practice is that Paul Volcker and Alan Greenspan built a strong political consensus around the idea of Fed independence so politicians don’t want to be seen as undermining it.

Earlier Fed chairs were much more inclined to do the bidding of the Johnson and Nixon administrations and this was a major contributor to the super-high inflation that emerged in the 1970s.

It is true that the Fed's independence could potentially be revoked by Congress (one of my advisers, Mike Munger, co-authored a paper modeling the extent to which the Fed can act freely given these political constraints [gated]). However, such an action has not been observed in practice because of the structure of the American political system, which restricts government action through a series of veto points. While not providing complete protection from political influence, this system provides substantially more independence than would be possible for a normal government agency under control of the president.

A similar principle applies here. If the Obama administration could pass legislation creating an independent board to administer the government's shares, any decision to revoke the board's charter would be subject to a filibuster, requiring an unlikely sixty votes to meddle in the decisions of a private corporation. Again, the level of protection would not be absolute, but it would be an improvement from the status quo.

Update 6/5 10:20 AM: Via Greg Mankiw, here's another example of political meddling reported by the Boston Globe:

General Motors Corp. will delay the closing of a Norton parts distribution center it planned to shutter by the end of the year, according to US Representative Barney Frank. The extension will temporarily preserve about 80 jobs.

The Norton warehouse is now expected stay open through July 2010, Frank said.

As part of its bankruptcy and government-backed restructuring, GM plans to close 14 US manufacturing plants and two other distribution centers by 2012. Workers at the Norton center learned Monday of its impending closing, the day the automaker filed for bankruptcy protection, said Mark Ridenour, the chairman of the United Auto Workers union that represents plant employees.

...The plant manager received word yesterday that Frank had successfully lobbied GM chief executive Fritz Henderson to delay the closing, according to Ridenour.

Frank said he met with Henderson on Wednesday to urge him to reevaluate the center's value to GM. He said he also stressed the loss of jobs would hurt already struggling Massachusetts families.

Frank, whose district includes Norton, said he told Henderson, "Look, I understand that these things have to happen but they don't have to happen in the midst of the worst recession in years."

GM officials decided to delay the closing of the plant after analyzing their East Coast distribution network and realizing they would need more time for a "orderly wind down," said spokeswoman Elaine Redd. She said the company has not set an exact date for the closing.

Frank has tremendous leverage over Henderson because he is the chairman of the House Financial Services Committee. Insulating the company from this sort of lobbying is going to be vital to getting GM back on its feet.

Update 6/15 10:46 AM: More evidence of political meddling from the New York Times:

Auto dealers accustomed to negotiating sales on their car lots clustered in the Capitol instead this week, looking to their trusty, neighborhood lawmakers to do some hard bargaining for them.

With about 2,000 Chrysler and General Motors dealers losing their franchises as the companies retrench, the dealers are pressing Congress to reverse what they see as an unfair process forcing some profitable businesses to close or stop selling new autos, with no explanation from the manufacturers of why they were singled out...

As they lobby Congress, angry dealers are finding an increasingly receptive audience in the House and Senate, where lawmakers say the mass termination of franchises by the bankrupt car companies is threatening tens of thousands of jobs, not to mention the civic fabric of communities where car dealerships are often a chief local institution...

[T]he campaign on behalf of the dealers is also providing a test of one of the central criticisms of the government’s intrusion into the operations of many companies, from banks to insurers to auto giants. Even as they talk tough about the mismanagement of car companies, can members of Congress withstand political pressure and allow Chrysler and G.M. to make tough economic decisions that might hurt their own constituents?

Answer: No.

Comments

[Rob]

It's an interesting idea, but not only isn't it likely to be adopted, it also probably wouldn't work very well. After all, the Administration and/or the Democrats controlling Congress would appoint the "independent experts," who would no doubt be selected in part because they share the Administration's view as to what is the proper product mix for GM (i.e., green) and which stakeholder is daddy's favorite (the UAW).

In addition, even if control of GM were vested in an independent board, it is to the Administration and Congressional Democrats that GM would have to appeal for additional infusions of cash down the road and/or for laws and regulations that favor its product mix (e.g., fleet average standards and subsidies to buyers). The Administration has paid the piper and will get to call the tune.

President Obama can say he inherited this problem, but he loudly encouraged the Bush Administration to loan the original $20 billion to GM, and he has presided over the decision to give GM an additional $30 billion, all the while pushing GM to disfavor the bondholders and favor the UAW in the reorganization. (To be fair, although the UAW didn't agree to cut its base pay or ease its work rules, it did agree to eliminate dental and vision benefits from its health care plan.)

[David]

Obama's actions have not always been consistent with his stated goal of taking a hands-off approach. E.g., Obama chose to make or or influence the following decisions:

-- to fire the CEO,
-- to choose the new CEO
-- to appoint an auto czar with various powers over auto companies
-- to involve the auto czar in deciding which GM dealerships to close.
-- to affect the decision of which models to build

By comparison, George Bush (wrongly IMHO) made a loan to GM, but he made no effort to direct or manage the company.

[Howard Craft]

Yes, there is a threat to meddling.

But the communities where GM has employees are also "stake holders" - the same as share holders, bond holders, union employees, dealerships, suppliers, etc.

Offering support to Mayor Bing seems similar to offering support to a city that has experienced a severe storm. The mayor wants to protect his community and there seems to be no harm in offering general reassurances of this type. Is there actually some compelling reason to cause more disruption...?

I wouldn't worry too much about GM being mismanaged any more poorly than they have mismanaged themselves.

Even the argument that the less government interference the better isn't completely supportable. The Japanese automakers have thrived for sixty tears with extensive government involvement. What matters more is making intelligent (or coordinated) decisions and their implementation.

If we look below the surface there are almost no markets or established industries that exist free of government oversight. It seems premature to wring our hands over potential interference as an abstract evil. But I would certainly agree that establishing GM outside of government "stewardship" should be accomplished as quickly as is reasonably possible.

[ming]

I voted for Obama, I admire him tremendously, and I know he inherited an economic disaster. Unfortunately, I believe that Obama is making a mistake in acting as if there is any chance that GM will ever be viable. There are some things that even Presidents can't do. Bush really thought he had enough money and power to fix Iraq. Obama really thinks he has enough money and power to fix GM. Unfortunately, it's hard to imagine GM making cars that real people would actually buy voluntarily. People buy cars based on money, but also on safety, reliability, and many other things. And the cars made by (for example) Toyota and Honda are simply too good. GM will never catch up. What is Obama going to do, put restrictions on sales of Toyotas? Will there be a presidential decree ("temporary", of course) that Toyota can't sell more Priuses than GM sells Chevy Volts? We're talking about parents who don't want their precious teenagers driving around in a Chevy Volt. You can't simply force cars on millions of American households. I regret this, because I know Obama has good intentions, and he's obviously working very hard. But it'll be like Bush and Iraq: the deeper Obama digs with GM, all he'll do is go deeper and deeper.