Seriously, please don't

President-elect Obama did Meet The Press on Sunday. In talking to Tom Brokaw about the potential auto industry bailout, he said “We don’t want government to run companies. Generally, government historically hasn’t done that very well.” He’s right, but again he’s underselling the dangers. Government just hasn’t done it very well, they’ve done it miserably.

The President-elect went on to describe a long-term government bailout that would be conditioned on government oversight. It could be that the government would mandate the types of cars companies make, mileage and environmental standards, and the investments they make (or do not make), to ensure that the industry “actually functions.” All of this sounds eerily close to a word that the Obama Administration wants to avoid the usage of at all costs: nationalization.

In 1952 President Henry Truman took over America’s steel industry to avoid an industry strike that would undermine our efforts in the Korean War. It was the last time the government toyed with the idea of nationalizing an industry, functionally or otherwise. It appears that Obama may be thinking what Truman said: “the president has the power to keep the country from going to hell.” The Supreme Court did not agree, however, and forced Truman to relinquish control. That there is so little opposition this time reflects the desperation. But that there is so little opposition this time also reflects a void of intelligent leadership.

There are three significant risks to this tactic. The first is what Obama himself admitted – that the government does not do this sort of thing well. He’s understating the reality, though. The government is absolutely and unconditionally miserable at it. Government’s record as a corporate executive has led to three-decades of privatization, turning national railroads, airlines, and defense industries into private companies.

What this plan sounds an awful lot like is controlled bankruptcy, where the government steps in to restructure an industry, as it could do if the industry declared bankruptcy, except that the industry won’t declare bankruptcy. What’s the point? The coverage is that it saves jobs and keeps Americans buying American cars. Both of these claims are ridiculous. Any serious reconstruction is going to require, fiscally, a net loss in jobs. This is because, addressing the second claim, that bankrupt or otherwise, Americans don’t buy American cars. Even regulating the kinds of cars manufactured and mileage minimums will not address this in the short term, because it will take time to get these vehicles on the road and even longer to instill some confidence in the products, while the investor (taxpayer) requires more immediate returns.

The second risk is that if the government fails (as history teaches us is highly probable), and the American car industry collapses or gets bought out by foreign competitors, taxpayers would lose the billions the government poured in. Part of what made the Wall Street bailout packages more palatable was that private companies were willing to buy some of the failing groups. That private industries were eager to step in and buy their failing counterparts gave taxpayers confidence that there was merit in the government providing additional assistance using their money. As Bill Gates so astutely told Wolf Blitzer, “After all, you have to say, if no one else is willing to invest, why is that? What is it that investors are seeing about this business model or cost structure that makes them unwilling? And why, in that case, is the government alone in stepping forward in these ways?...when you don’t have any private investors, you really have to say, is taxpayers’ money going to have the desired effect?”

The third risk, which deserves far more attention than it is getting, is that by stepping in to save the auto industry the government is going against the spirit of what it has preached around the world for the last 20 plus years. America has demanded that nations treat our companies on their soil the same as they treat their own companies, a concept called “national treatment.”

So far, however there has been no talk of offering aid to Toyota, Honda, BMW, or any other foreign automaker that have factories on our soil and employ our citizens (all the while managing to make a profit, making a great case for government action to dissolve the UAW). “If Japan was doing this, we’d be threatening billions of dollars in retaliation,” said Jeffrey Garten a professor at Yale, who as under secretary of commerce in the 90s tried in vain to get the industry prepared for international competition. “In fact, when they did something a lot more subtle, we threatened exactly that,” referring to calls for import restrictions.

To be fair, it is hard to measure the risks Obama may be willing to take with his plan seeing as so much of it is still a work in progress. In the short term, Democrats are looking at linking $15 billion in immediate loans to a “car czar” who could require or veto transactions or investments, essentially a one-man board of directors. This is huge power, yet the current administration has signaled it would be likely to sign this sort of plan.

That $15 billion is just the tip of the iceberg. “After that, we’re in uncharted water,” said Malcolm Salter, a Harvard Business School professor and former adviser to GM and Ford. “Think about this: Who in the federal government would have the tremendous insight needed to fix this industry?” It certainly is not anyone in the US Congress, even less the case when you see the same photograph of Barney Frank and Nancy Pelosi attached to every story on the bailout.

Depending on the role and tactics the government decides to take, the efforts could end up looking a lot like the role of the Japanese Ministry of International Trade and Industry in the 1970s and 80s. To promote the Japanese car industry on the way up, the Ministry pushed companies towards consolidation and even tried to mandate which segments of the market each could participate in. Soichiro Honda, the namesake of the Honda Company, rebelled when told that he should limit himself to motorcycles – a smart decision. Congress denounced this as “industry policy” and argued that it put American makers at a competitive disadvantage and compromised free enterprise.

Now, Congress is doing exactly what the Japanese did, but not as the industry is on its way up, but rather down. The Japanese and others will no double complain, and they would be right, or worse, begin doing the same for their own auto industries. In the end, the most appropriate question to ask as the investor (as we the tax-paying population are in this case) is “would I, or do others, buy the product I’m investing in?” As someone who comes from a family who only buys American cars, the responsible answer is “no” across the board.