July 5, 2010
by Ken Lewenza
General Motors’ recent announcement that it has fully repaid the loans it received from the US, Canadian and Ontario governments years ahead of schedule and with interest, was another positive sign of the auto industry’s gradual recovery. And it affirms that the strategy our governments followed during last year’s economic meltdown was the right one.
Some commentators at the time argued governments should have let the companies languish, but inaction would have resulted in the collapse of GM and Chrysler, the loss of tens of thousands of crucial jobs and billions of dollars in additional expense for governments.
It turns out the government involvement was a good investment, not a “bailout” and its legacy is the communities that have been strengthened by the preservation of key plants and jobs of taxpaying Canadians, including tens of thousands of spin-off jobs.
GM’s loan repayment and the profits now being reported by both GM and Chrysler have whetted the appetites of some observers for government to dispose of its remaining stake in the two companies. But the loans GM received were a small share of the total amount of government support that went to the firm; the rest was in the form of equity. The US, Canadian and Ontario governments are also major equity owners of Chrysler. What should be done with those shares in the long run, as the companies gradually regain their footing?
By disposing of its shares and exiting the industry, government would be leaving all the decisions up to the profit-maximizing judgments of auto industry executives and the investors they work for. Underlying this view is the notion that private investors know how to run the industry better than government. But “private knows best” is not a valid assumption to make. If private investors are indeed more capable of making rational, efficient decisions, how did we end up in last year’s crisis?
Government participation in the future actions of these companies, through a continuing equity stake, would help ensure they act in everyone’s best long-term interests rather than continuing to pursue short-term profits regardless of the economic and social consequences.
The global auto industry offers many examples of the beneficial role minority public ownership plays in stabilizing automakers where they are based. Volkswagen is arguably the most successful automaker in the world today and is owned in part by the state government in Lower Saxony, where the company has its origins. That stake has been used to leverage a continuing commitment from VW to maintain a strong German presence, despite the country’s high labour costs. Government officials don’t get involved in day-to-day decision-making but the company knows it has a responsibility to German society.