Adam Smith on the President and the government running GM

Mr. Kuehn, if after much thought and polite consideration of the opinions of others, is it arrogance if one still disagrees with the majority opinion? IMO we should have the

courage of our convictions and not be swayed by the mob.

dg lesvic -

Re: "Wow - you are really, really arrogant and you probably don't even realize it."

And let me clarify - not arrogant because you ordered around waiters. I don't care about that. Arrogant because when a lot of people disagree with you, you skip over the possibility that you could be wrong and just assume they're going through a phase.

vidyohs -

Re: "I may not be everyone on this Cafe, but I can see I am joined by a whole lot of others who consistently come in with good solid observations that show they actually have their heads up and ready for what comes, and their comments seem to say they have somewhat the same view of you as I do. "

This blog is very interesting to stop by, but it is very very isolated from the rest of the world. Of course everything you hear here sounds insightful and reaffirms what you say!!!! They come here because they agree with you!!!! Try going on a blog where nobody agrees with you. You'll have your share of thoughtful commenters who disagree with you (Sam, MnM), your sometimes irritatable disagreers (Methinks), and then you'll have people who don't even know what they're talking about and just like to yell (Oil Shock). Put yourself in that environment and try to put your thoughts up against more than just the occasionaly dissent from me and Gil - and then you'll see what a big pond the world really is.

kingstu-

RE: "I think you are making a distinction between government investing because they “know better” and government spending money to avoid the “social costs” of bankruptcy."

EXACTLY. I don't see the point of patronizing people with Adam Smith the way this post does, when those people (1.) already know this, and (2.) have a great deal of respect for this insight.

Re: "Any spending of taxpayer dollars is an explicit affirmation that the government thinks it can “do better” than a private citizen spending his or her own money. Otherwise, why spend taxpayer dollars in the first place?"

The collective action problem, that's why.

BoscoH -

Re: "Under your way of thinking, mutli-billion dollar payoffs to constituents with other people's money isn't a "use of capital"."

Of course they're not - no more than multibillion dollar payoffs by private gangsters. The point is, they're not trying to run a company or assuming they can. They may have an ignoble political interest or a more noble public interest, but they certainly are not under the impression they can run a car company, DESPITE the fact that Russ and Don think they have cleverly caught BHO in an act of hubris.

dg lesvic -

Re: "He and his army of the young remind me of myself when as a very young man I first heard the jingle of my own money in my pocket, heard myself called Mister, and thought myself fit to order about waiters and waitresses much older than myself."

Wow - you are really, really arrogant and you probably don't even realize it.

And how about this for a horror flick?

I Was a Teenage Zombie for Obama!!!!

"The statesman who should attempt to direct private people in what manner they ought to employ their capitals would...assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."

An amazing quote, and the perfect description of Good King Barack.

He and his army of the young remind me of myself when as a very young man I first heard the jingle of my own money in my pocket, heard myself called Mister, and thought myself fit to order about waiters and waitresses much older than myself.

In life we learn, but in politics only at a terrible cost.

What will be the price of this children's crusade?

Oh sh....t, and accelerator ...should of course been, and accelerate.

Between us and Adam comes an intervening couple of hundred years or so. That is such a short time in human reckoning.

Fashions may change, technological advancements come and accelerator capitalizing each upon the one that came before; but, we humans make just how much advancement in character and wisdom?

Is Obama or Pelosi much that different from King George and his fellow aristocrats in their view of lesser people and their endeavors? I think not.

DK,

I read your first comment and was actually going to agree with most of what you said, just one good disagreement; but then I began to read down, and man, I gotta say, DK, you are one blind f..cker and it is your own brilliance that is doing it to you.

Course you're a middle of the roader, definitely not a statist......oh no!

I may not be everyone on this Cafe, but I can see I am joined by a whole lot of others who consistently come in with good solid observations that show they actually have their heads up and ready for what comes, and their comments seem to say they have somewhat the same view of you as I do.

Damn I am in good company! By the way, do you take being labeled arrogant as a compliment?

You sumtin else mon!

"Do you really think Obama was bitching at bondholders because he thought he knew better how to use their capital?"

Yes, he thought their capital was put to better use by paying off UAW retirees rather earning a return for their investors. BTW, do you think it ever occurred to Obama that investors in those bond funds were 401k investors hoping to retire at some point?

Do you really think Obama was bitching at bondholders because he thought he knew better how to use their capital?

You're kidding me, right? Of course he thought that their capital should go in the pockets of the UAW. That's why he did that.

Under your way of thinking, mutli-billion dollar payoffs to constituents with other people's money isn't a "use of capital". But presumably then, building green cars that we're all out here clamoring for to replace our shiney trucks and SUVs is directing "use of capital". Or am I still confused?

"Smith is describing the direction of capital because the state thinks it knows how to use that capital more productively than the private owners."

I think you are making a distinction between government investing because they “know better” and government spending money to avoid the “social costs” of bankruptcy. Even though I understand your position, I don’t see a difference. Any spending of taxpayer dollars is an explicit affirmation that the government thinks it can “do better” than a private citizen spending his or her own money. Otherwise, why spend taxpayer dollars in the first place?

BoscoH -

RE: "I.e, write off losses they don't have to so that unsecured creditors in a favored political group (UAW) can get a better return than the secured creditors!"

First - I don't agree with what they did to the Chrysler bondholders (if some agreed to the plan willingly, that's fine by me - but I don't like the pressure to).

Second - of course it's different from what Smith is describing. Smith is describing the direction of capital because the state thinks it knows how to use that capital more productively than the private owners. Do you really think Obama was bitching at bondholders because he thought he knew better how to use their capital? No. He did it because he was strongarming them to achieve his political goals. It's not the same, even if you and I disagree with it. It's not the same. And it's not tantamount to a man crush to say that Obama knows he can't run a car company.

BoscoH -

RE: "Please explain to us how anything would have changed had such a policy been in place at the start of this decade."

Why do you expect I would know that? I have no idea what Obama is talking about specifically, and so I don't even know if I'd agree with it. I haven't agreed with anything he's done regarding executive pay to date, so there's a good chance I won't agree with what he's planning here.

Your bridge analogy is wrong I think. Incentivizing execs to foster long term growth isn't the same as not paying them until the end of the long-term! If this is just going to be a matter of walling of some forms of compensation that encourage execs to produce short term growth at the expense of long term growth, I might be able to get behind that - as long as it doesn't put limits on how much compensation they can receive. How do you expect me to know if Obama is talking about that or not?

Yeah, Obama's thuggish behavior in the Chrysler bankruptcy has nothing in common with this:

The statesman who should attempt to direct private people in what manner they ought to employ their capitals...

I.e, write off losses they don't have to so that unsecured creditors in a favored political group (UAW) can get a better return than the secured creditors!

Mike Farmer: I was being sarcastic. Thats a stupid argument I have heard time and time again, that "things" are different now. What things are different and why that makes these basic principles of economics and human behavior out of date is never explained, just that "things are different", so supposedly, everything we used to know is out the window. But always, what you say is true, that because the economy is even more complex, it makes a hands-off attitude by the government even more necessary.

Daniel writes I don't think they fail to understand or accept Adam Smith's insight.

You may be right, becuase politicians are the species of domestic industry which can employ free capital for their own personal greatest value, which is paying off their supporters.

Oh, and Daniel, now Obama wants compensation in the financial industry structured to align with "long term growth". Please explain to us how anything would have changed had such a policy been in place at the start of this decade. Specifically, what is the time horizon for "long term growth"?

Imagine you need a bridge built and you can only offer to pay workers when the bridge is completed. Who is going to put their sweat into that bridge? Most certainly, not the best bridge builders.

Oh, and who in their right mind is going to have the cajones to stand up to a bully President if their short term compensation doesn't incentivize them to stand firm for their client's interests?

BoscoH -

Re: "Yes, and your man-crush on the Obamanator is blinding you from seeing it."

Ah yes, this one. No, I don't think my assumption that Obama isn't completely naive and delluded, and a liar quite amounts to a man-crush.

You also might not want to cite a case that I have explicitly disagreed with the administration on to try and prove me wrong. Even in that case, though, idiotically breaking with established bankruptcy proceedures is not the kind of running a company that Smith describes, is it?

RE: "You're right. He's not Chavez or Putin. But we have a higher standard here than the people in Venezuela or Russia. "

But the point is the goals weren't even the same and it bears little resemblance to what Smith was talking about either.

Do you REALLY think the administration thinks it's able to run these companies successfully? Do you REALLY think the administration wants to?

Yes, and your man-crush on the Obamanator is blinding you from seeing it. Case in point, Chrysler bankruptcy. They tried to push through a settlement which would have paid secured creditors $.34 on the dollar and the UAW (an unsecured creditor) $.50 on the dollar. That is setting prices and doing so in a way totally inconsistent with bankruptcy law. Then to call out the hedge fund managers as "greedy" for not giving up their rights. These managers have fiduciary responsibility to their clients and their clients' clients, most of whom are like the "good people" Obama promised to help.

You're right. He's not Chavez or Putin. But we have a higher standard here than the people in Venezuela or Russia. Credit is available and friction is low because lenders believe they can assess risk. Friction increases when know-it-all Presidents call out market players who are playing by the rules.

"I just think there's reason to be concerned about these specific forms of compensation."

I am far more concerned with the government not allowing firms to fail which allows managers to profit hugely when they bet right and lose nothing when they bet wrong.

Mcwop -

RE: "Daniel, they are putting money into GM and Chrysler to pay off their political supporters (unions), and punish their enemies (investors)."

I think it's more likely that they're doing it because the domestic auto industry is concentrated in swing states, and while they are genuinely concerned about the employment effects I described, they're especially sensitive (in my opinion too sensitive) to employment in those specific states. But that is neither here nor there. Even if these are their intentions, I don't think they fail to understand or accept Adam Smith's insight.

kingstu -

RE: "Options awards exploded when Clinton attempted to limit cash compensation. What do you imagine will happen if the government tries to limit stock options? I don’t know either…which is probably why they call it the law of “unintended” consequences."

Right, which is why I've never claimed to forsee the future. I'm very concerned about unintended consequences. Indeed, the entire concern with options is their unintended consequences!!! On their face they seem like pretty useful instruments! I liked the article you posted on Clinton - thanks for that.

Here's the thing - Clinton put limits on cash compensation because he didn't like CEO's earning so much. It's a stupid goal. I wouldn't want to limit how much CEO's can earn, I just think there's reason to be concerned about these specific forms of compensation. It's somewhat of a different goal and issue, I think - don't you?

Daniel, they are putting money into GM and Chrysler to pay off their political supporters (unions), and punish their enemies (investors).

"so I wouldn't mind seeing a little more regulation of their use as compensation"

Options awards exploded when Clinton attempted to limit cash compensation. What do you imagine will happen if the government tries to limit stock options? I don’t know either…which is probably why they call it the law of “unintended” consequences.

kingstu -

RE: "Not only is the administration terrible at running companies, they are also terrible at investing in companies. They have effectively invested $83BN (and counting) in taxpayer dollars in several bankrupt auto companies."

Not to belabor the point, but that's the point! They're not investing in these companies because they think they're a good investment!!! They're investing because nobody thinks it's a good investment and they don't want to see a panicked collapse of one of the biggest companies in the world. Again - I think it was a bad call in this case, but I hope you're not under the impression that they're putting money into GM because it's a good investment!!!

If anyone is interested...

How Bill Clinton Helped Boost CEO Pay

http://www.businessweek.com/magazine/content/06_48/b4011079.htm

The government would do well to remember the law of unintended consequences trumps the law of appeasing special interest groups.

Ike -

And I hope you know my sarcasm was meant to be humorous and corrective, not snarky and corrective :) I have recently been accused of being argumentative on another post (which I suppose I am), so I want to make sure to cushion that!

And to be quite honest I'm very concerned about these ad hoc interferences with compensation and bonuses as well. I don't like it. I do worry that stock options introduce perverse incentives, so I wouldn't mind seeing a little more regulation of their use as compensation. But that's all, and I certainly wouldn't want to see any regulation of the LEVEL of compensation. So in fact I am quite in agreement with you on this point.

"Do you REALLY think the administration thinks it's able to run these companies successfully? Do you REALLY think the administration wants to?"

Not only is the administration terrible at running companies, they are also terrible at investing in companies. They have effectively invested $83BN (and counting) in taxpayer dollars in several bankrupt auto companies. If I wanted to gamble on bankrupt auto companies I could have done that perfectly well by purchasing stock options.

Daniel, I wasn't intentionally being vague on that point.

And I agree with you that we're not at Putin/Kim Jong-Il levels, and need to ratchet the outrage more precisely.

I was merely pointing out that the Federal Government doesn't need to "own" the shares and sit in the boardroom to point us down the same road with similar results.

History is a study of unintended consequences. It is no accident that governments are so prominent in history.

;)

Daniel, do you have any proof that the alternative of no government intervention is worse?

"a man who had folly and presumption enough to fancy himself fit to exercise it."

It's as if Adam Smith actually traveled through time and knew all about Barack Obama.

Re: "Do you remember what happened the last time the government tried to limit executive compensation?"

I can't say I know the last time they tried this. But I'm glad you say "limit executive compensation", rather than Ike's vaguely apocalyptic phrasing: "set prices and dictate compensation".

Technically speaking I guess Ike isn't entirely inaccurate (despite the fact that he is being deliberately vague)... but I still like your phrasing much better kingstu. Nice work.

kingstu -

RE: "If these were truly “good” investments, what would stop taxpayers from voluntarily purchasing new stock offerings in the likes of AIG and GM to keep them afloat?"

You miss the point. It's not because they are good investments. It's precisely because no private actors from purchasing new stock options that the government felt the need to step in - not with the purpose of or interest in or faith in their ability to run the company (as Smith is talking about), but simply to stop the bleeding.

There's a lot to criticize in that decision, don't get me wrong! I just don't understand why people insist on drawing parallels to Chavez and Putin (I know I drew that parallel here, but I've seen it out there), which seem like non sequitors to me.

I guess my question is -

"Do you REALLY think the administration thinks it's able to run these companies successfully? Do you REALLY think the administration wants to?" If they did think that (and I really don't think they do), then Russ is right and they oughta read their Adam Smith. If they DON'T think that, then let's think about the issue at hand rather than raising points that everyone's already aware of.

One of my favorite Smith quotes; and perhaps one of his most important insights.

"But oh so much has changed since Adam Smith's time. Do you really think that still applies?"

Precisely because things have changed and the economy is more complex makes Smith's words more applicable than ever.

"Do you mean that they want to introduce some regulation of executive pay in specific industries specifically around the use of stock options for compensation... OR do you mean that they're trying to revive the NRA, John K. Galbraith, and Richard Nixon?"

Do you remember what happened the last time the government tried to limit executive compensation?

By giving billions of taxpayer’s dollars to private companies, the federal government has done exactly what Smith warned against. If these were truly “good” investments, what would stop taxpayers from voluntarily purchasing new stock offerings in the likes of AIG and GM to keep them afloat?

Who do you think owns the “capital” the government decided to borrow to bail out GM and AIG? If the federal government incurs a debt, it is future taxpayers who are responsible for the repayment. The government took private capital (in the form of a claim against future taxes) and directed it to a private company.

Simply by taking this capital and lending it to a private company (that could not otherwise borrow it from the capital markets) hasn’t the government decided that it knows better than private citizens?

Ike -

They want to set prices and dictate compensation??? That's news to me.

Do you mean that they want to introduce some regulation of executive pay in specific industries specifically around the use of stock options for compensation... OR do you mean that they're trying to revive the NRA, John K. Galbraith, and Richard Nixon?

Because as I say above: "That still might not justify it in some people's minds, but it's an important distinction to make."

Daniel, I think it also ought to apply to the current trend of government wanting to set prices and dictate compensation. No matter how innocent and noble the intent of the bureaucrat who wields the power.

Always a good insight to be reminded of - and as I do oppose the auto bailout, one I can sympathize with.

But let's not cross our wires here. Smith is talking about a state that thinks it can do a better job directing capital than the owners of capital. It's akin to Chavez or Putin taking over an oil company.

This seems to me to be analytically different from a state that knows it can't run a car company or a bank, but bites the bullet on the social costs of it's inability to run a car company or a bank in an act of economic triage on a recessionary battlefield where the alternative disorder might cause far more damage (despite the fact that in ordinary times, this disorder would be able to right itself). In other words - this is more accurately a situation where GM is going into something like receivership, rather than a situation where the government thinks it can do a great job running GM.

That still might not justify it in some people's minds (it certainly doesn't justify it in my mind when it comes to the auto industry), but it's an important distinction to make.

But oh so much has changed since Adam Smith's time. Do you really think that still applies?