It’s pretty clear that the US government is going to be heavily involved in General Motors and the banks, and it looks to me that the US government is making a lot of the classic mistakes in running state-owned enterprises.
A few thoughts as to what I think the US is doing wrong….
1) Not adjusting to the “new normal”. As long is the US thinks of owning the banks and General Motors as a “temporary aberation” you are going to have problems. Maybe the long term goal should be to sell off GM and the banks to private investors, but this can and will only happen after years of restructuring. The problem with thinking of things as a short term fix is that it forces everyone to think in terms of quick fixes which don’t work and end up costing more in the long run.
2) The government must act as owner. To me it seems incomprehensible that the Federal government is taking such large ownership stakes without having at least a seat on the board of directors. You can argue that governments don’t know how to run car companies, and they don’t. But neither do private investors, which is why people hire and fire managers. As owner, the job of the private investor and the government should be the same which is to maximize returns. The state has other interests, but these have to be exercised by other agencies.
The job of the Board directors is *not* to manage the company, that’s the job of the professional managers. The job of the director is to represent the interests of shareholders and oversee the managers, and right now there is no effective mechanism that I see for doing that, and the fact that American companies often are very skewed toward managers at the expense of owners is part of what got us into this mess.
3) The government has to separate out commercial interests from regulatory and social interests. There is a legitimate state interest in protecting employment, in preventing pollution, and in having companies may a profit, but these roles conflict and you simply cannot have the same person in charge of all of these roles. It’s like a trial in which the judge, prosecutor, and public defender can all be state officials, but they have different roles to play. Something that is going to hurt a lot is that you don’t have the “state as owner” functions separated from the “state as regulator” and this is going to cause huge problems.
4) Health care and pensions – The biggest problem that the Chinese SOE’s faced was that they were being forced to pay for health care and pensions. This is a problem for GM since GM managers are being forced to be both auto manufacturers and health and pension supervisors. What China did was to have the state assume the health and pension liabilities of the SOE’s. Once the SOE’s no longer had to pay these, they could focus on growth, at which point they generated profits, which the state could take and then pay for it’s liabilities.
5) The role of local governments – One other thing that helped Chinese SOE’s was that the SOE’s were often owned by different and conflicting local governments which allowed functions to be separated. One thing that the Federal government could do is to contract with state governments to manage their interests as owners. This could be useful because different states have different interests that could be used to diversify the board. If the state of Michigan has a seat on the board, they are going to care about unions and lost jobs. The state of Mississipi just isn’t, and is going to do whatever it can to squeeze the unions and cut jobs in Michigan. If you have both on the board, you end up with a diverse and probably more effective board of directors.
One other thing is that the Federal government has no effective institutions for exercising ownership powers over companies, because it’s something that the Federal government has never had to do. State governments do.
6) The government as shareholder has to have interests aligned with other shareholders. The part of the government that acts as shareholder has to have interests aligned with other private shareholders. The Chinese government has set things up so that when the government makes a profit, it is shared on a equal basis with other shareholders. The fear of a private shareholder is that the government can come in and take everything, and the government indeed can….. One time and only one time….
The trouble with the government investments in GM and the banks is that the government now has priority over other investors. This is not a good thing because it means that no private shareholders are going to be willing to invest in GM or the banks, and ultimately this makes things more expensive for the government. If you have the government actually owning common stock, this forces the government as owner to try to make the company profitable, and this in turn means that the government as owner will fire the managers if that isn’t happening, and get new ones.
Right now the relationship between GM and the government seems to be very dysfunctional. Basically GM is saying that if the government doesn’t put in money, that they will declare themselves bankrupt and make things very expensive for the government. They are basically holding themselves hostage. The problem with this is that at this point the government either hands GM a blank check and has GM blow up the economy. The problem with this is that the government doesn’t have ownership interest. If the government acted as owner, they could write the check and fire the managers that forced them to write the checks.