Why Does Obama Think He Can Run the Car Companies?

April 3, 2009 -- I nearly fell off my chair when I read that President Barack Obama had fired the CEO of General Motors, Rick Wagoner, last weekend. Granted, his dismissal was just a condition of continued government assistance to the troubled carmaker. GM could have walked way from the deal and retained its independence. Still, the move does set a disturbing precedent.

Now, one might ask, why wouldn’t government money come with strings attached? Recipients of taxpayer funds should be held accountable for spending those funds wisely, shouldn’t they? And who better to hold them accountable than taxpayers’ representatives in government, who doled out this largesse in the first place?

Wagoner vs. Wagner

There are certainly reasons why shareholders might have wanted to jettison Mr. Wagoner. Since he took over the top job in 2000, GM’s market share fell from 29 percent to 20 percent. In addition, its stock has plummeted from a high of around $90 shortly before he assumed the position to below $3 a share when he stepped down.

Clearly, the company has suffered under Mr. Wagoner’s leadership, and he must take at least some of that blame. But if President Obama were really serious about helping GM, Chrysler, and Ford turn their fortunes around, he might consider removing the albatross weighing down the Big Three by trimming the sails of the UAW (United Auto Workers).

Thanks to the 1935 Wagner Act and a 1975 fuel economy law , which give the UAW much of its power, the Big Three American automakers are forced to operate at a competitive disadvantage compared with their foreign counterparts. As Holman W. Jenkins Jr. tells it in a recent column in the Wall Street Journal , “The result is downright weird: ‘Our’ auto companies operate in a world that’s less ‘American,’ in a sense, than the Japanese and German companies that come here and enjoy a free labor market.” In a downturn, the burden of union-inflated wages and pensions becomes that much more significant.

The Fatal Conceit

Even though Wagoner must of course shoulder some of the blame for GM’s poor performance—it is in worse shape than Ford, which suffers under the same union burdens—we must still wonder if the President of the United States is the right person to determine when it’s time for a CEO to go. President Obama protested on Monday that he had no interest in running the automobile industry, but the ousting of Wagoner smacks of what Austrian economist Friedrich Hayek called the “fatal conceit.” As John Lott points out on The Fox Forum, Obama and his advisors “have neither the corporate executive experience nor the financial incentives to get this right.” Indeed, no central authority can have the knowledge required to run all of the various businesses in an entire economy—and no central authority will take as much care with other people’s money as those people should themselves.

Yes, government (i.e., taxpayer) money does come with strings attached. Whoever foots the bill in any enterprise wants to have a say in the way things are run. But this is not an argument for humbly accepting those strings; it is an argument for proudly refusing to beg for a government bailout.

In a free market, businesses that fail to keep pace with the competition get weeded out. They get bought up or file for bankruptcy and get liquidated, allowing the more successful companies to continue producing better products more efficiently. It is not a painless process, but everyone is better off in the long run as increases in productivity are translated into lower prices for all.

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Obama and his advisors “have neither the corporate executive experience nor the financial incentives to get this right.”

Government interventions, especially in labor relations, do distort the market, making it harder for all affected companies to remain in business. And further government intervention, in the form of bailouts and stimulus packages, will only make things worse. The current downturn complicates matters, but it too was largely caused by government interventions. Most importantly, inflationary monetary policy resulted in widespread malinvestment during the boom period, just as the Austrian theory of the business cycle predicts. Clearly, we must end government manipulation of the money supply just as surely as we must end government manipulation of the labor market.

A Faustian Bargain

The superficial logic of letting government run the show if it ponies up the funds is defeated by the fact that it cannot run the show effectively. By what magical incantations and readings of tea leaves are government bureaucrats supposed to know what’s best for one business or another? Only the spontaneously ordered decisions of millions of profit-seeking entrepreneurs responding to signals from hundreds of millions of consumers can “run” the market. Sure, individual entrepreneurs make mistakes. But when they do so in a free market, they suffer the consequences without taking the whole economy down along with them.

In addition to these practical considerations, there is the deeper moral issue: By what right is the successfully earned income of some confiscated to pay for the failures of others? Does the fact that GM needs help represent a valid claim on the earnings of those who do not need help? The moral is the practical, and there is no surer way to drive an economy into the ground than to punish success and reward failure.

Accepting government money is a Faustian bargain. Instead of selling our souls to the devil, we should fight for true economic freedom, so that employers and employees will be allowed to reach voluntary agreements to mutual benefit; so that individual businesses will succeed or fail on their own merits; so that money will be a trustworthy store of value. No President, no matter how smart, can successfully micromanage an entire economy. Only freedom can deliver the prosperity and stability that politicians pretend is theirs to offer.

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