GM's Wagoner and Why Government Takeovers Are Inherently Problematic

GM's CEO Rick Wagoner is out at the behest of the Obama White House. This move is at once (a) no surprise; (b) deserved; (c) suspicious. And it is because it is both (a) and (b) that (c) is so significant.

First, one can hardly imagine a corporation losing 95% of its market capitalization and not firing its CEO. On that count the move is both (a) and (b).

Second, one can hardly have missed the pitchfork-and-torch-bearing mobs that confronted the hapless executives of AIG, and so one can hardly be surprised that another government-bailed corporation would be forced to shake up senior management. That qualifies for (a) if not (b).

So whence the ongoing reality of (c)? It has to do with the limitations of government.

Corporations normally make decisions based on directors' perception of the corporation's best interests, which are in turn the shareholders' best interests. They obviously make fabulous mistakes along the way and are subject to all kinds of influences, but in the end, one can expect nothing other than corporate profitability to run the show. The matter is complicated by human nature, but not by inherent conflict of interest. When a corporate board fires a CEO, the question is not which set of interests prevailed but whether the singular set of interests were well served by the decision.

When corporations fail, they generally find themselves in bankruptcy court, where judges, guided by laws and precedents, set up processes for the reorganization or dissolution of the corporations. Judges are as fallible as anyone, but in such a setting they are as objective as humans can be. And their record in such proceedings is not bad overall.

Politicians, on the other hand, make decisions for poltical reasons as well as for reasons of public good. A politician who finds herself administering a failed company may want to do what's right for the company. She certainly should want to do what's right for the public. But she definitely will want to do what's right to stay in power, which means satisfying what she perceives as the short-term view of the uninformed electorate.

Sometimes a politician will do the right thing as opposed to the politic thing. Sometimes the vox populi, the public interest and corporate fiscal responsibility coincide. But always, when a politician makes a decision, we assume the decision is made for political reasons. That's always a political problem. And for the corporation involved in a government takeover, it generally also accompanies a deepened fiscal problem.

We don't disagree with the firing of the hapless Wagoner. We simply note that the real reasons this move will forever be questioned.

That's while elected officials are miserable corporate boards and not even that great as corporate receivers. That's why GM would have been better off in bankruptcy court, where it seems destined to end up anyway. And that's why we hope that this generation of "progressives" will learn what previous generations have learned already: that when government overreaches, it makes a bigger mess than existed before.