Nationalizing GM

I thought that EJ Dionne was going to easily take the award for dumbest column of the day, but then I read this piece by Dan Neil, resident automotive critic at the LA Times that advocates nationalization of General Motors. Let's walk through this column step by step:

Here are the benefits of nationalization:

GM's fundamental problem is that it's too big -- and expecting it to fix itself in exchange for a $10-billion to $15-billion loan (its share of the vaunted $25-billion bailout) or magically right-size in Chapter 11 is foolhardy. It would take too long, cost too much and bankruptcy, should it come, would send customers running for the hills. Time is of the essence. Congress, writing a GM law and using federal power to abrogate contracts, could achieve at least some of these goals at a stroke.

Too big? What does that mean? How do you know if an organization is too big? GM's fundamental problem is that its costs exceeds its revenues, which is the case for a myriad of reasons.

GM is full of talent and potential. The company spent $8.1 billion on research and development last year, second only to Toyota. Of all the carmakers, GM is closest to commercializing a full-size, four-door, plug-in electric vehicle, the Volt, due in the fourth quarter of 2010. The Volt should travel about 40 miles in all-electric mode before requiring the services of its onboard, gas-powered generator. Many owners could go weeks before they used any gasoline. This is precisely the sort of car that environmental and energy security advocates have been clamoring for.

But not, apparently, consumers. Too bad he doesn't expand more on the Volt, which appears likely to retail for $40,000. And for all that you get a vehicle that can travel a grand total of 40 miles between charges. Great. I'm sure people will be lining out the door and around the block for it. And this is the result of billions in research? Jesus, end the pain and kill this company now.

GM's business is growing in other parts of the world; it's only the North American operations that are killing the company. This is a corporation that had $181 billion in revenue and sold 9.4 million vehicles in 2007. To put it another way: GM, though distressed, looks like a good investment. Also, the federal government can sell the company -- at a profit -- once it's righted and sailing forward again.

If it's such a great investment then investors should be clamoring to buy it. The fact that they aren't speaks volumes.

GM is competing with companies that are quasi-national now. If you consider the advantages the government of Japan has bestowed on Toyota, Nissan and Honda -- in terms of healthcare and retirement benefits for its employees -- the unevenness of the field is clear. The same goes for most European companies, and the rising rivals in China will enjoy similar state-subsidized advantages.

They also pay a higher corporate income tax rate. further, plenty of Japanese cars are produced here in the U.S. by American workers that do receive the benefits he is talking about. But even if we accept this argument, it means that the Japanese government is subsidizing the production of automobiles, which is a home run for us. That Toyota in your driveway would cost more if it wasn't for the generous souls in Tokyo -- put them on your Christmas card list.

The government can afford long-term planning. Many of GM's strategic missteps -- such as betting large on trucks and SUVs and not investing early in hybrid technology -- were the result of willful shortsightedness at the board level, responding to a financial market in which shareholders look for the quick return. Putting Uncle Sam in charge would fundamentally enlarge the return-on-investment horizon.

This is truly mind-bending. You know, the Soviets had plenty of long-term planning and didn't feel the heat of shareholders looking for a quick buck and look where it got them. Again, consider the Capitol Visitor Center.

We need government-sized automotive help anyway. This country should be putting millions of plug-in hybrid and electric vehicles on the road. As far as I can tell, without big subsidies, there is no way in the near term to build these vehicles and make a reasonable profit, due to the stubbornly high cost of advanced batteries. Besides, if GM were owned by the government, it wouldn't spend time and money litigating and lobbying against clean-air and safety rules.

Why should we be putting plug-in hybrids and electric vehicles on the road? Is this guy some kind of seer that can predict the future? If the costs exceed benefits we would be doing this already. Indeed, the fact that huge subsidies -- i.e. wealth transfers -- would be required is a pretty big clue that such vehicles shouldn't be produced.

Update: I emailed Dan outlining some of my concerns. He responded with the following:

I'm not suggesting the government run GM, only own it -- and make some money off it too, btw. The problem is that the market is great at answering needs, lousy at anticipating needs, and that delay is especially acute in the car business, where car design can take two-three years. No private investor is going to buy GM becuase of the company's debt; the government is on the hook anyway if the company should fail -- guaranteeing pensions, lost tax revenue, unemployment benefits. No private investor stands to lose like that.

We need electric vehicles to deal with an imperative public need, which is to get off foreign oil and deal with climate change. People are demanding that GM -- a corporation -- answer this public need, but they don't say how. See, I kind of feel like I'm defending free enterprise!

My response:

Dan,

First off, thanks for your response. However, when you use language in your column such as government "long-term planning" and "putting Uncle Sam in charge" you should forgive the reader if they see that as running things. Also, I would submit that if you think that the politicians are going to fork over large sums of cash with absolutely zero strings attached you are seriously mistaken.

I would disagree that the market is lousy at anticipating needs. In almost every aspect of my life it does a great job, from the iPod sitting on my desk to the turkey that was waiting at the store for me last week. The fact is, your argument that we need fleets of plug-in hybrids and electric cars on the road is only a guess on your part. Barring clairvoyance you can't make this argument with a huge degree of certainty. Do you have powers to foretell the future that automakers lack? If it's so obvious don't you think that they would produce such cars?

Rather than guess at the solution the better approach is to place a tax on the problem -- gas. Tax the gas to account for the pollution and national security costs it imposes and then let consumers make the decision. But if I can buy a car for $15,000 that will do the same job as the $40,000 Volt then it would be the height of stupidity for me to purchase the latter. It's a waste of $25,000 -- unless you really believe that we get $25,000 worth of benefits on climate change and cutting down on foreign oil (which most likely comes from our two biggest sources -- Canada and Mexico) for each car.

Free enterprise is letting companies and consumers figure out what products best satisfy their needs. What you are advocating is dictating to producers and consumers what should be made.

Regards,

Colin