The doomed fate of Government Motors

The Wall Street Journal has a pessimistic, but realistic take on what will happen with Obama's takeover of General Motors.

There's also the labor agreement that the UAW approved last week, which goes some way toward reducing costs but probably not enough to make the new, smaller GM competitive. The new agreement simplifies some work rules and job descriptions but makes no reductions in hourly pay, pensions or health care for active workers. The agreement must also be renegotiated in two years by an Obama Administration running for re-election and weighing the need to keep Big Labor happy against the risks to taxpayer-shareholders. Who do you think wins that White House debate?

The Administration's concessions to the UAW also restrict the company's ability to import smaller, more fuel-efficient cars that it already makes overseas. UAW President Ron Gettelfinger boasted on PBS's "NewsHour" last week that "we, quite frankly, put pressure on the White House, the [auto] task force, the corporation" to bar small-car imports from overseas. GM is also selling its Opel operation in Europe as part of this restructuring, and the Washington Post reports that one of Treasury's sale conditions is that Opel's new owners must stay out of the U.S., and even out of China, where GM's business is strong.

This is raw trade protectionism. It is also textbook cartel behavior and would be an antitrust violation if practiced by a business. But the benefits for GM are illusory because the import limits mean the company will have to spend even more to retool its domestic plants to make the little green cars that President Obama and Congress are demanding. No one knows if Americans will buy such cars, even if GM can make them competitively in the U.S.

As they predict, we will see the worst of government myopia now applied to the car industry.

The Administration promises to wield a light ownership hand, but it's only a matter of time before Congress starts to micromanage GM's business judgments. Every decision to close a plant will be second-guessed, much like a military base-closing. And what about buying parts from foreign suppliers? Will those also be banned when Mr. Gettelfinger demands it, even if the costs are lower? GM's managers and directors will have one eye on enhancing shareholder value, but the other on pleasing their political minders in Washington.

The Obama Administration has been whispering to the press that it could start selling its stake within a year to 18 months, and that it hopes to be out of the business entirely in five years. But even assuming that the taxpayer investment stops at $50 billion, GM would have to be worth a cool $80 billion for taxpayers to break even on their 60% stake. By way of comparison, GM's market capitalization at its recent peak in 2000 was only $56 billion.

The larger corruption will be when government tries to vindicate its ownership by favoring GM over Ford and the other auto makers that aren't wards of the state. The TARP legislation contained one blatant example in the form of a $7,500 tax credit for consumers who buy GM's new electric car, the Chevy Volt. Expect more such favoritism, including huge new subsidies for green cars if consumers prove resistant to their charms.

What will happen to Ford when the government starts tipping the scales in favor of GM? Will there be diktats issued that all government-owned vehicles must now be purchased from GM rather than based on some more rational cost-benefit analysis? And does anyone expect the Obama administration to take the tough measures necessary when it comes to renegotiating UAW contracts?

Perhaps it will give you more confidence to read this profile of the 31-year old guy in the Obama administration in charge of dismantling GM.

It is not every 31-year-old who, in a first government job, finds himself dismantling General Motors and rewriting the rules of American capitalism.

But that, in short, is the job description for Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry.

Nor, for that matter, had he given much thought to what ailed an industry that had been in decline ever since he was born. A bit laconic and looking every bit the just-out-of-graduate-school student adjusting to life in the West Wing — “he’s got this beard that appears and disappears,” says Steven Rattner, one of the leaders of President Obama’s automotive task force — Mr. Deese was thrown into the auto industry’s maelstrom as soon the election-night parties ended.

“There was a time between Nov. 4 and mid-February when I was the only full-time member of the auto task force,” Mr. Deese, a special assistant to the president for economic policy, acknowledged recently as he hurried between his desk at the White House and the Treasury building next door. “It was a little scary.”

How comforting.