State Ownership of Businesses

Whatever you think about the necessity of the various government bailouts of banks, insurance companies, investment banks and now auto makers, we should all clearly recognize the inevitable consequences of state ownership and thus ultimately control of enterprises. When governments own enterprises, they have an obligation to the tax payers to ensure that their oversight of the companies they finance serves the public interest. History is full of examples of how this has worked out in practice around the world—bloated work forces (how can a caring public official say no to unemployed relatives); thus high cost, uncompetitive outputs; misdirected investments (how can a caring public official say no to constituents in his home town); thus low productivity and losses; thus lower growth and per capital income—but our Congress has wasted no time in demonstrating how it works.


This morning’s Washington Post reports that "Lawmakers Chide Automakers Over Dealership Cuts". Surely no one imagines that Congressmen have better judgment about the contribution to the profits and thus the financial viability of GM of its dealer franchise arrangements than GM does itself. Congressmen are responding to the complaints and pressures from GM dealers in their congressional districts. Why would these dealers go to their congressmen to try to pressure bankrupt GM to give them a better deal with tax payers’ money? Well, of course, because the U.S. government and thus Congress now own a significant share of GM and thus have a say in its business decisions. You might hope that your congressman puts the national interest first (the restoration of a viable profitably GM), but you will generally be disappointed (unless you are a GM car dealer). It is our representative’s local congressional district voters who put and keep him/her in office and whose interests must come first. This is the nature of and the way government works and is one of the many reasons it should not own enterprises.

In yesterday’s Post Steven Pearlstein gave one of many specific examples of this behavior: “For sheer hypocrisy, however, you can’t beat Republican Sen. Bob Corker of Tennessee. Last November, Corker took to the Senate floor to denounce the Bush administration’s proposal for bailing out domestic auto manufacturers, saying it didn’t force the companies to do enough to restructure their costs and their operations. Among his big concerns: oversize dealer networks that prevented even the strongest dealerships from making a decent profit.

“Fast forward to today, as Chrysler and GM are finally undergoing the radical downsizing and restructuring that Corker had long demanded. And what does Corker have to say about that? He’s outraged at the way the discontinued dealers have been treated and is pushing legislation to ensure that they get at least six months to wind down their operations and receive full refunds from the automakers for any unsold cars or parts.”[1]

From across the isle Rep John P. Murtha (D-Pa) says it all (in connection with his investigation for favors to and from the “military industrial complex?): "If I’m corrupt, it’s because I take care of my district."[2]

When President Bush first proposed bailing out GM and Chrysler, I argued that if they could not raise the money they needed in the market they should seek the protection of bankruptcy, which provides a well defined and orderly process for restructuring (if warranted) under Chapter XI. A year later both have declared bankruptcy, but the new Obama administration has managed to make mush of the legal bankruptcy process (e.g. treating junior creditors better than senior credits[3]) further politicizing our economy and eroding the rule of clearly defined property rights, which provide the basis on which investors act. I still have confidence that most policy makers of both parties understand the risks of moral hazard and the importance of incentives in guiding behavior, but if they ever get out of hole they dug in crisis mode to start rebuilding a sounder long run, they will have many steps to climb to get out of the policy mess we are in. But for the sake of the country we need to reclarify what should be rendered unto Caesar and what is ours.

[1] Steven Pearlstein,  "Crisis Managers vs. Naysayers" The Washington Post, Friday June 12, 2009

[2] The Washington Post,   "Eye-Opening Earmarks" June 14, 2009 Page A16.     

[3] George F Will, "More Judicial Activism, Please", The Washington Post, June 14, 2009, A15.

Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.

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