The Unseen Costs of Government Intervention in Businesses

Yesterday morning, I heard Alabama's Republican Senator and ranking member of the Senate Banking Committee, Richard Shelby, say on CNBC, in reference to the auto maker bailouts, to paraphrase,


'I hope GM succeeds.'


Frankly, I was horrified. It's bad enough that both the Bush and Obama administrations allowed GM and Cerebrus/Chrysler to avoid bankruptcy court via Chapter 11.


But to hear a conservative Republican express a desired outcome for a specific company was very disappointing.


In my opinion, the sentiment which Senator Shelby should have expressed was,


"As a member of Congress, I cannot, of course, express preference for one competitive US company to the detriment of another. To indicate that I, rather than the market, possess a desire for any US company to have a specific outcome is improper.


Rather, I wish that GM receive and experience what our markets, both consumer and financial, judge appropriate for the company.


If that means survival now, on its own resources, and success in the future, so be it. If, instead, it means the firm cannot continue operations, and must file for Chapter 11 bankruptcy, again, so be it."


It is simply wrong for our federal government to engage in such massive intervention as to be lending private-sector companies money, in hopes of avoiding their demise.


How can our government possible know, better than the natural forces of our markets, that the best use of, for example, some building in Flint, Michigan, is as a GM plant, rather than the new home of some entrepreneur's business?


What if the fall in rental price of that former plant is the key to allowing some new business to flourish, employing workers and having better growth prospects than GM?


In the same way as the administration's hamhanded approach to mortgage foreclosure relief is frustrating attempts by new aspirants to homeownership, about which I wrote here recently, the distressing attempts by our government to "pick winners" in the private sector is mistakenly substituting governmental preference for that of our consumer and capital markets.


Isn't this what the Soviet Union tried, and ultimately found to be inefficient, unworkable and a failure for most of the 20th century?

Who among us truly believes that our federal government is more skilled than consumers and investors in the selection of those business which ought to survive and prosper?

By propping up GM and refusing to allow it, if necessary, to enter Chapter 11 proceedings, our government- both Congress and the administration- is merely delaying the inevitable market-clearing dissolution of failing and failed companies, the recycling of their resources a la Schumpeter's observations of eighty years ago, and the freeing up of labor to be employed in new ventures.

Government isn't the right institution to select our economy's winners and losers. For that, we have a process which we have trusted for most of our country's life- our freely-operating, private capital and consumer markets.