The Means of Production

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"The Means of Production"

You can count me as among those who thought having the government step in to prop up General Motors was a bad ahead. Simply put, the history of public ownership of firms in competitive marketplaces is one of bad management and misallocated priorities. But the Government Motors Era looks to have turned out pretty well, with the government earning a decent return on its equity investment and a fair chunk of jobs very genuinely saved.

The key, as Kevin Drum says, is that you always do have the option of not mismanaging your state-owned enterprise: “In the end the Obama administration didn’t exercise all that much control over the company . . . in the post-bankruptcy stage, the administration has taken an almost obsessive hands-off attitude toward GM’s operations, especially considering that they were a 61% shareholder.”

Depending on your attitude toward the Obama administration and toward the United Auto Workers your exact take on this may vary. But I think the important thing is to try to draw some lessons here that can be abstracted away from GM and the Obama administration. In particular, in part we’re seeing here a manifestation of the well-known but under-discussed equity premium puzzle. Basically it seems to be the case that if the government borrows money and uses the money to take equity stakes in real firms, the government’s superior risk-carrying capacity lets it make money. But that’s only if government ownership doesn’t induce horrible mismanagement, which it’s unwise to count on. The fear of mismanagement is why it wouldn’t make sense for the US Treasury to go out and buy 7-Eleven franchises. But in many cases you can avoid this worry. It would, for example, make sense for a portion of the Social Security Trust Fund to be invested in a diversified equity portfolio.

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