May 2, 2010

Big government, crony capitalism and the latest from Government Motors

Donald B. Hawthorne

Big government, whom some foolishly think is the pathway to so-called social justice for the little guy, actually has the opposite effect. It incentivizes big corporations, big unions and other powerful organizations to feed at the enlarged government trough to buy favors at the expense of those unable to pay for a place at the trough. This leads to what used to be called "corporate (or union) welfare" and some now call "crony capitalism."

Whatever the label, the result is the same: Transparent competition in the marketplace that benefits consumers is trumped by the non-transparent buying of legal or regulatory favors that benefit the few at the expense of the many. In other words, big government enables the powerful to prey on others, as predicted by public choice economic theory. How ironic it is then that when the structural incentives created by big government cause the forecasted negative outcomes, the advocates for big government call for yet more of the same.

Why do these negative outcomes surprise any of us? Take ObamaCare, where the Congress passed and the President signed a 2,200-page bill that no one had read. Forget for a moment how passing such a large bill that no one read should startle all of us into loud protests. The bill now goes to unelected, unaccountable, nameless, faceless bureaucrats for the development of endless pages of regulations, the existence of which will only further ensure their job stability. Does anyone really think those uniform regulations drafted in the vacuum of government office buildings in the nation's capital will provide easier access to better healthcare services by being responsive to the differing needs of a cross-section of citizens in, say, Peoria, Illinois, Chandler, Arizona, Tucker, Georgia, and Yakima, Washington? But you can be assured that large insurers and medical service companies will have their lobbyists walking the hallways to influence the regulations in ways that are responsive to their own economic needs. Again, the irony: These companies do it not because they are evil but because they are responding rationally to their adjusted self-interest as determined by the new economic incentives created by the ObamaCare legislation.

So when government seeks to play God and takes over activities best done by the free market, there are adverse consequences. (Just like so-called "campaign finance reform" in an era of big government has created its own set of perverse incentives that result in more money flowing into politics in different and often less visible ways.)

Government Motors, aka General Motors, is merely one recent example. Taxpayers' money was used to bail them out, allowing them to avoid the hard choices of restructuring the company to profitability - either on their own or in a traditional bankruptcy process. Now GM touts in a very public ad how they have paid back their government loan ahead of schedule and with interest. And GM went even further with their CEO writing a WSJ editorial entitled The GM Bailout: Paid Back in Full - The investment of U.S. and Canadian tax dollars worked. Except (with H/T to Instapundit) they misled everyone by not disclosing that the loan was only a small part of the total bailout and they repaid it with other federal government-provided funds that were sitting in a separate escrow account available for their working capital needs. (More on the government dollars that flowed to GM.) It gets worse: Apparently this ad is part of a campaign to lay the groundwork for GM to get billions more of DOE government aid at a lower interest rate, again funded by the taxpayers at a time of record budget deficits.

Contemplate the perverse incentives created by these unfolding developments. How would a corporation ordinarily fund new projects? Usually out of positive operating cash flow generated from profits of the business, a scenario that would only happen after the project successfully competed against other internal capital project alternatives advocated by other executives through showing more compelling projected financial returns. (Of course, this funding approach would require GM to be profitable and generating positive cash flow, but I digress.) Alternatively, GM could get the money from new equity investors or lenders. Which means they would have to convince those investors or lenders to bet on their plan, in part based on the merits of the plan and in part based on management's past track record. In parallel, these investors and lenders are getting measured quarterly by their own funding sources based on the quality of their performance in comparison to other current investment alternatives available to the funding sources. If equity investors or lenders enter into bad deals, their funding sources will pull back, adversely impacting their business. So the equity investors and lenders have an incentive to deeply scrutinize a GM deal and evaluate its merits in competition with all the alternative deals they could do at the time. But that is not how crony capitalism works: GM only has to privately curry favor in Washington, D.C. among bureaucrats who become more influential when they respond favorably to such behavior, who become even more influential when they have larger projects like the new DOE loans, who have no effective mechanisms for oversight and accountability, and who suffer no adverse consequences if they enter into bad deals.

By the way, to add insult to injury for taxpayers, the political pressure to rush through bankruptcy without the requisite time for an adequate restructuring of their cost structure no doubt contributed to GM (and the other ward of the state, Chrysler) losing billions of dollars last quarter in their first quarter after exiting bankruptcy. For all we know, the rationale for the DOE loan could be to fund changes that ordinarily would have been accomplished in a proper bankruptcy restructuring. Meanwhile Ford, which faced market realities the free market way, turned a profit.

The loss of liberty and cost to taxpayers are profound when you look at the particulars of crony capitalism created by big government.

Why do we tolerate this erosion of our freedom?


With another H/T to Instapundit, Megan McArdle on Department of . . . Huh?:

It was bad enough that we had to bail out the banks, but at least you could make a reasonable argument that we had to--we know what happens when you allow widespread bank runs, and its generally pretty disastrous for the citizenry. But you know what happens when a large auto manufacturer fails? Its employees and customers have to do business somewhere else...

It was sheer political theater, and incredibly corrosive to public trust in our government institutions, as well as a gross misallocation of economic resources. The role of the state is to prevent human suffering, not prop up failing enterprises that happen to have politically well-connected employees. I am genuinely struggling to come up with what principled argument Andrew might be making in his head for what has always struck me as a pretty blatant handout to a powerful Democratic interest group.


With an updated H/T to Instapundit, Hot Air writes NY Times: GM, Treasury lied about bailout repayment:

This article by Gretchen Morrison in the New York Times is significant for two reasons. First, the Times has decided to give this significant coverage, which means the story of GM's misleading claim of paying back the taxpayer-funded bailout will continue to have some legs. More importantly, it also points the finger at Treasury and the Obama administration for its complicity in allowing CEO Ed Whitacre to make those claims without challenge...
[quoting from the Times' article]: G.M. also crowed about its loan repayment in a national television ad and the United States Treasury also marked the moment with a press release: "We are encouraged that G.M. has repaid its debt well ahead of schedule and confident that the company is on a strong path to viability," said Timothy F. Geithner, the Treasury secretary.

Taxpayers are naturally eager for news about bailout repayments. But what neither G.M. nor the Treasury disclosed was that the company simply used other funds held by the Treasury to pay off its original loan.

Hot Air also references a Power Line post where Scott Johnson wrote:

Whitacre and GM omitted two facts that render their public relations blitz highly misleading. They are the kind of omissions that constitute securities fraud when made by a company in connection with the purchase or sale of a security or when a company reports its financial results...

GM's fraudulent public relations blitz took place with the support of the Obama administration, up to and including Secretary of the Treasury Timothy Geithner. Geithner's participation makes his tax cheating and related testimony pale in comparison.

In retrospect, it is obvious that GM undertook the blitz at the behest of the Obama administration. It is symptomatic of the era of national socialism in which we find ourselves, and for which GM is a leading indicator.

Apparently crony capitalism makes reality optional and accountability non-existent. And liberty is reduced.


Mark Tapscott's Did Obama administration tell GM to lie about its TARP repayment? provides links to written Congressional requests for more information about what happened, including these words from Senator Grassley to Treasury Secretary Geithner:

In reality, it looks like GM merely used one source of TARP funds to repay another. The taxpayers are still on the hook, and whether TARP funds are ultimately recovered depends entirely on the government's ability to sell GM stock in the future. Treasury has merely exchanged a legal right to repayment for an uncertain hope of sharing in the future growth of GM. A debt-for-equity swap is not a repayment.

I am also troubled by the timing of this latest maneuver. According to Mr. Barofsky, Treasury had supervisory authority over GM's use of these TARP escrow funds. Since GM's exit from bankruptcy court, Treasury had approved the use of the escrow funds for costs such as GM's obligations to its parts supplier Delphi.

Tapscott concludes with this observation:

...Accusations and worries of improper government interference with business are inevitable results of government picking winners and losers in the private economy, as was done with the trillions of tax dollars used by the Bush and Obama administrations to bail out Wall Street investment firms, GM and Chrysler, insurance giant AIG, and multiple banks.

There is a name for the kind of regime that allows private ownership of businesses but effectively tells them what to produce and sell. It's called Fascism. America is far from there, but becoming a bailout nation is a significant step in the wrong direction.


Competitive Enterprise Institute: General Motors Deceptive Advertising Challenged by Watchdog Group in FTC Filing.

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"It incentivizes big corporations, big unions and other powerful organizations to feed at the enlarged government trough to buy favors at the expense of those unable to pay for a place at the trough. }It incentivizes big corporations, big unions and other powerful organizations to feed at the enlarged government trough to buy favors at the expense of those unable to pay for a place at the trough."

It is an unfortunate fact of human nature that "big people" are not interested in dealing with "little people".

A "big" government official wants to deal with the CEO of Gm, the president of the UAW, etc. These people understand "big problems".

They definitely don't want to deal with a small manufacturing guy who employs a 100 people. No decision made in that setting will "shake the earth". Better to deal with "big people" who "know how things work". Nothing new here, it is all set out in Atlas Shrugged, what was that 1957?

Posted by: Warrington Faust at May 2, 2010 9:00 PM

All of it is also reminiscent of fascism as practiced in Mussolini's Italy.

Mussolini had his blackshirts, and Obama has his (SEIU) purple shirts.

Posted by: Ragin' Rhode Islander at May 3, 2010 7:48 AM

I don't like the term "crony capitalism". It is an insult to capitalism. In fact, I'm not fond of the term "capitalism" either, as it was coined by Marx as a pejorative term for the free economy.

Success in business isn't merely about capital (money) and labor. It is equally, if not more about ideas: new technologies, new products, new ways of providing goods and services to people. The political debate has for decades ignored this, the critical third leg of economics, without which the other two cannot stand.

Posted by: BobN at May 3, 2010 8:31 AM

"big government enables the powerful to prey on others"

Ah, if only we could return to the days of unbridled capitalism and small government, a workers paradise! No need to check that link, the "theory" says it must be true. No seriously, please don't!

The truth is, there are real Libertarians out there, people who place a very high value on individual rights and who believe this government — like most every government — too often interferes with those rights. Of course, actual Libertarians realize that for individual rights to have any meaning, they require the presence of a body that can ensure those rights. They know that freedom can’t be maintained in an absence of information, and that there must be agencies that create the transparency needed for effective individual action and ensure there are consequences to dishonesty. Real advocates of the free market realize that term has no meaning unless the market is free from coercion and the law is not defined by “might makes right.” They know that individual freedoms are incompatible with a system where corporations are treated as super-citizens and that Libertarianism requires that workers be more valued that abstract entities that live only on paper.

The difference between actual Libertarians and Republicans hiding from their tarnished name is quite easy. Actual Libertarians are concerned about the freedom of individuals. Conservatives use Libertarian as a code word meaning “I want to continue to enjoy all the privileges I do now, but I don’t want to share them with you and most of all I don’t want to pay any taxes.” Push come to shove, they’re happy to abbreviate that to “Screw freedom. I just don’t want to pay taxes.”

Posted by: Russ at May 3, 2010 4:46 PM

Oh, yeah, a bunch of breathless allegations from a bullshit Leftist blog really counts as evidence against free economics and constitutional government.

All that link demonstrates is that in order to believe any "facts" presented by Leftists one must first share their beliefs.

Posted by: BobN at May 3, 2010 5:02 PM

Donald Hawthorne's blog is full of unsubstantiated opinions. If one were so inclined, one could also call them a bunch of Rightist bullshit, demonstrating that in order to believe any "facts" presented by Rightwing ideologues one must first share their beliefs.

BobN restates his beliefs, which are probably important to BobN, but to few others.

BobN, this may shock you,but most of us don't give a damn for your unfounded assertions. Now go beat your chest while you repeat your refrain, "Gault Good. Obama Bad." Try not to throw feces while you are doing so.

Posted by: OldTimeLefty at May 3, 2010 10:07 PM

Fortunately for me, there are a great many more readers of AR than the small terrorist cell of Leftist commenters.

News reports of the many acts of violence and vandalism by Leftist demonstrators on May 1 contrast with the 100% record of peaceful, clean Tea Party events to give the lie to Lefty's false claim.

Posted by: BobN at May 4, 2010 7:52 AM

Ignoring, as one should, BobN's unsubstantiated assertions about false claims, I will comment that his remark about "Clean Tea Party events" brings to mind Carlo Levi's comment that "Fascism has a clean face."

Posted by: OldTimeLefty at May 4, 2010 10:37 AM

Well, make all the false associations of entirely separate things you wish, merely putting words next to each other doesn't affect reality.

The difference in behavior between Leftist, union-sponsored street violence and the consistently civil, peaceful, and clean Tea Party and other conservative demonstrations speaks for itself. It's all on video if you dare to watch.

Posted by: BobN at May 4, 2010 7:24 PM

The difference in behavior between Leftist, union-sponsored street violence and the consistently civil, peaceful, and clean Tea Party and other conservative demonstrations speaks for itself. _BobN

How government responds to demonstrations may have something to do with violence.
Let's be reminded that May 4 2010 marks the 40th anniversary of the Kent State shootings. On May 4th, 1970 National Guardsmen opened fire on hundreds of unarmed students at an anti-war demonstration at Kent State University in Ohio.

Posted by: Phil at May 4, 2010 9:36 PM
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