The Hazards of State Owned Enterprise, an editorial

During the Bailout season many have critiqued the government for reverting to a socialist like method of resolving our current economic woes. Much like many of the socialist systems we must avoid the pitfalls inherent in the economic bailout process. Chief among these perils is becoming the patrons of non-performing loans to State Owned Enterprises (henceforth SOEs).

The conundrum is that political favors may have been promised in exchange for support this election. The electorate, particularly those in the automaking industry may be expecting or even feel entitled to a portion of the 700 Billion in exchange for their support in the recently finished election. Rather than worrying about placating lobbyists and special interests, it is the duty of newly elected government officials to ask whether or not these loans make long term sense. Ideally the long-term benefit of the nation as a whole should be paramount to the failure of domestic companies and resulting unemployment. The loans that we have issued have not been used as intended, sitting in the coffers of companies or have been eaten up by debt assets.

Automakers are not financial institutions. Though they are large major corporations that employ thousands, on could not call them an integral part of the financial sector. They are in part a weather-vane for the economy, but by no means is their survival essential to the preservation of American ownership of real estate. The automakers have a long history of terrible performance. A five year decline in stock price of 86% for Ford, thanks but no thanks. If they are unable to compete in foreign or domestic markets (GM may have the most popular non-state contracted car on the market in China, the Buick, but VW, Citroen, and Fiat are much more commonly seen on the road), that is not the fault and responsibility of the US taxpayer. Strategically they chose poorly in their niche market of large, fuel inefficient cars.

Now that energy sustainability has supposedly become a priority on the presidential docket, how can our president elect justify propping up manufacturers of gas guzzlers? Oil is a limited resource. The technology that the automakers sell is outdated and consumes far too much of this resource. Though automakers have made token efforts to develop alternatives to gasoline, they have in a large part hampered the development of other technologies out of selfishness. The first diesel engine was run on peanut oil, so we have known for more than a century about alternatives, but been restrained by political connections from making the necessary dramatic changes. Not only would bailing out the auto-making industry not make fiscal sense, it does not make environmental sense.

Classical examples of SOEs becoming a drain on the economy are everywhere throughout Asia. The Chaebols of South Korea, which drove the national development of steel, cosmetics and chemicals, and electronics and cell-phones, became a tremendous burden for Korea in the years 1997 and 1998. Japan’s current economic problems, with growth hovering around less than 1% and banks struggling to keep interest rates positive, can be largely attributed to their SOEs, the Zaibatsu. Japan cannot pull out of these industries because of long-standing connections between managers and the government and promises of life-long employment. The United States should not follow down this same path. China, who many see as an economic power-house, quietly passed its own 600 Billion dollar bailout and Consumption stimulus package because of SOEs. China is held captive by non-performing loans to SOEs that the state-owned banks renew year after year. They have no choice but to do so, or else watch their economy implode. If we are “socialist” let’s not fall in to the same trap as other socialists before us. Unlike these countries that seemingly have no choice; we are faced with an important choice.

Shame on you Barney Frank and president Bush for considering placing the United States in to a dilemma which we have seen the unpleasant outcomes of again and again. To newly elected officials I would offer this word of warning, at what cost comes domestic protectionism. I would urge you all to oppose giving handouts that do not make sense. In the short-run, this may benefit the economy and help prop up ailing companies, but it creates an unhealthy system of dependency which it is difficult to extricate one’s self from. What happens when the car companies come crawling back again for another handout?