Recurring Decimals…..

Everything here is irrelevant

About the complaints on Obama’s interference in Detroit

with 5 comments

The government has no business involving itself in business.

That is the popular refrain you will hear from fiscal conservatives/libertarians and such. Personally, I don’t disagree with the sentiment. Even in these tough times, I believe that the economy is best served by private enterprise with limited interference from the government. Plus, anyone growing up in India through the 70-80’s  observed first hand how governmental involvement creates inefficiency in business  (e.g. land-line phone companies) and how too much red-tapism destroy entrepreneurial spirits (or limits it to a dedicated or privileged few).  So in general, I am all for the government keeping their fingers off private businesses.

Except, when they have a right to it, by virtue of ummmm…….say few billion dollars invested ! I am of course, referring to all the hullabaloo over Obama’s recent sacking of the GM CEO Wagoner. Predictably, a swathe of right-wing bloggers (even some liberal ones) are upset over what they perceive as the administration’s needless meddling. The Corner sums it up thus:

GM is now Obama’ s company. If it closes, it will be on his say-so. But Obama is a politician, not a CEO. So his first concern is to avoid bad political fallout, which means he will prop up the company for as long as it takes, regardless of what makes economic sense.

This is very much on the lines of emotion expressed by Don Boudreaux in an editorial on USA Today earlier this month (he was talking about bank nationalization, but the idea is the same):

Politicians’ incentives differ radically from those of private owners. Few politicians look past the next election or beyond the familiar interest groups whose support is crucial.

(A very typical line that is often parroted by a certain eminent Indian libertarian blogger as well.)

All this is mildly amusing.  I wonder if people writing these stuff have any idea about the irony: Last time I checked, the current financial mess was created not by politicians, but private businesses, or rather the heads of certain private businesses. And the reason it happened is that these CEOs, just like politicians, were looking at short-term incentives – lining their own pockets with bonuses without considering long-term ramifications of their risky investments.

Similar short-sightedness have contributed to the fall of  the Detroit Big 3.  Rather than compete with foreign automakers by designing better vehicles in terms of quality, reliability and fuel-efficiency, they have been content to sit on the sales of poorly made gas-guzzling SUVs and trucks and lobbying to block any legislation that impact fuel efficiency.


The problem is that the government should not have been involved in this mess at all (although when such a large number of people’s jobs are on the line, it is difficult for a modern government to be hands-off – and remember that while people are blaming Obama, the major bailouts  were passed by the Bush administration). But now that it is involved having paid the dollars, you cannot complain about its involvement, for good or bad.


Written by BongoP'o'ndit

March 31, 2009 at 7:53 am

5 Responses

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  1. I’m glad you wrote this. Much of the opposition to the government’s action is done on theoretical grounds unmindful of the context and the current situation. As you say, most of us are against any government interference but when errant business practices caused this mess, there is simply no other choice.

    Just like socialism promises the heavens based on good intentions, pure capitalism also is based on the premise of merit and self-interest that will make everyone better-off. Sadly we know that is not how it happens in practice. But perhaps a middle ground albeit more toward the capitalism side has to be sought.


    March 31, 2009 at 11:04 am

  2. Absolutely. The clincher in your post is
    And the reason it happened is that these CEOs, just like politicians, were looking at short-term incentives


    March 31, 2009 at 5:20 pm

  3. I dont understand why some folks are talking about GM closing? It would file bankruptcy through Chapter 11 which would give GM the

    1) Time to pay debtors

    2) Forcefully restructure the org and dismantle the union which is making GM’s operating cost skyrocket.



    April 1, 2009 at 10:19 am

  4. Bongo,

    Let me be the unpopular one here. The government shd not have bailed out the financial companies nor the autos in the first place. Here is the thing. As you say, the only reason the government can reasonably get involved is because of the large number of jobs. However, one can reasonably question whether the government stopping needed corrections is proper.

    It seems to me that the American economy, and most certainly the British economy, is over-invested in finance and the financial crisis will divert people away from finance. Government propping up the financial firms prevents that process.

    Similarly, the “American” auto giants are badly run businesses which can’t make cars that customers will buy. Past union contracts is one factor, but the huge culture of “hochchhe hobe” that permeates these companies makes any reasonable restructuring unlikely outside bankruptcy. Remember, there cost structure as well and culture got fixed in an era when America was essentially the only developed country whose industrial capacity was left unscathed after the war. In that scenario of little competition, education and skill premium was small, and it was possible to pay a lot for lower skilled jobs and still turn a decent profit. That scenario does not hold any more.

    One could argue that the govt shd have gotten involved not to change the economic structure permanently, but to have a wind down that is slower than the bankruptcy process, but still fast enough so that economic fundamentals are respected. However that does not seem to have been the case so far. The market expectations (until recently for autos) seems to have been that the government was avoiding bankruptcy at all costs.

    This is counter productive. One reason the Lehman bankruptcy affected the market so much was because participants expected it to be bailed out. That actually was a good opportunity not to bail out AIG that week. That way no one would have ever assumed anything else.

    Corporate Serf

    April 1, 2009 at 11:27 am

  5. @Pat: There is certainly no ideal ‘free-market economy’, as there is no ideal socialism. I wonder even if there is an ideal ‘middle-ground’ ! But certainly, I would err on the side of individual freedom and minimum interventions.

    @subbuki: yep

    @Achiles: Bankruptcy would probably be the best option. But do read Corporate Serf’s comment as well.

    @CS: Your views are actually not unpopular and I agree very much with your comments. Govt should not be involved at all, and when involved should be taking wiser decisions.

    My post was to mainly point out the irony that while politicians are always blamed for being short term in their thinking, the financial collapse was brought down by short-term thinking by certain people in the markets itself. And even after that so many fiscal conservative commentators keep parroting the point.


    April 1, 2009 at 9:22 pm

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