Many have discussed the taking over of General Motors by the United States Federal Government, but few major news outlets have provided much discussion to the inherent dangers of any such state-run enterprise. Government takeover of private business is a notoriously unproductive and inefficient endeavor. One example of a government-run business is Amtrak, which has not only failed to produce a profit but has required billions of dollars of government expenditure since 1971. There is a greater danger in this situation however, because now we have a government which is strongly incentivized to destroy the competition in the process.

Government has a different metric of profitability than do ordinary businesses. Standard businesses determine profitability according to cash flow and net income. Governments determine profitability according to the continuation of a particular political regime through elections or other means. Governments thus have an incentive to run businesses in accordance with the goal of political advancement, and are not generally concerned if the bottom line is hurt. So, a government-run business, for fear of political reprisal, may not fire someone who is being unproductive, but it may seek to hire new workers according to the interests of particular constituencies. Not only are such politically motivated decisions lacking of benefit to productivity, but they actually damage efficiency by forcing the company to expend resources in pursuit of political ends that would otherwise be used for productive purposes. No senator or congressperson would seriously allow a factory in their state or district to be shut down, regardless of its economic viability. Few union demands, however harmful to the company, would be refused by a Democrat administration. Antitrust lawsuits? I think not. Politics prevents hard decisions from being made, because those who would take the blame are beholden to those doing the blaming.

Government does not face the possibility of failure and thus the pressures of the market. Ordinary businesses collapse when they do not make wise economic decisions, but governments only collapse with revolution--an unlikely outcome to say the least. Governments thus have no real reason to adapt to consumer demand when it can merely tax those consumers to subsidize its company. The problem with having a monopoly position in an otherwise competitive market is that you do not have to grow and adapt to survive, which means that you stagnate, and the taxpayers are the ones who suffer.

Government has non-competitive means by which to destroy its competitors. Have you ever tried to play poker with someone who gets to decide which cards are dealt to whom? It is always a mistake to put the person who gets to set and change the rules of the game in a player's seat.  The government has innumerable tools which it can use to circumvent and undermine competitive markets in various situations. Suppose a new regulation establishing some new safety requirement for automobiles is coming down the pike, but no one knows it yet. One could hardly be surprised if GM begins adjusting its designs to comply with the new regulations before the rest of the market even knows they are coming. Or suppose that the Department of Justice initiates antitrust lawsuits against Ford or Toyota for some contrived reason in order to undermine their competitiveness or at least drain resources. Or suppose GM is faced with a union demand for stricter labor standards or greater benefits, and, in order to pacify the union while avoiding a disadvantaged market position, a bill suddenly appears in Congress to force all companies to comply with those demands. Or suppose that a new subsidy is offered to the first company which can produce a vehicle which is identical to one that GM has been developing for the past year. There are literally hundreds of ways in which the government could use and abuse its position of power in the market, and to expect them not to use that power is to imply a degree of delirium which suggests the need for institutionalization.

If there were no incentive for the government to defeat its competitors, then one might believe that the government would be content to sit back, own a car company, and lose taxpayer money without feeling the need to use its monopoly powers to destroy the competition. Such is not the case here. This administration will want to make GM 'profitable' by whatever means necessary for two essential reasons.

First, this administration has invested heavily in the GM bailout. The investment is not just financial, it is political. If GM fails, then the investment looks bad, and the wisdom of the intervention in the first place is widely suspect. President Obama has committed himself to creating a "stronger, more competitive" GM, that GM will be able to "out-compete automakers around the world." Failure or the appearance of failure towards the end of his first term would be politically unpalatable, and is therefore unlikely to be permitted.

Second, the administration has stated the strong desire "to get out quickly" of the auto-making business. Unfortunately, the only way for the government to get out of GM would be to sell its stake, and the only way to find a buyer for it would be to make it profitable. In order to unload GM, the government will therefore be highly incentivized to do whatever it takes to defeat the competition and achieve a relative degree of profitability through market monopolization.

Although President Obama has stated that he does not want to run GM, there are four reasons that this does not matter. First, even if the government stays out of the direct decision-making process of the business, it seems likely that there will always be the option for a discreet phone-call or meeting: some sort of government activity behind the scenes of GM. Second, political interests tend to get their way, and this president has shown himself willing to break promises, so at some point in the future he is likely to let political gain override any inclination he has to keep his word. Third, the government does not need to run GM to facilitate an unfair advantage for GM. The incentive structure remains the same to use subsidies, regulations, and taxes to manipulate market forces to GM's advantage. Fourth, this entire question can be discarded because the administration has already fired GM's CEO, restructured its board of directors, and has set about creating new mandates for vehicle designs.

Why should we care? Well, once the government runs down every other car company to the point where GM has 'beaten' the competition, or even to the point where GM has monopolized the market, everyone loses except perhaps for those in positions of political power.

Consumers suffer because they lose options on the sorts of vehicles they can buy and the variety of companies from which they can choose, because they are forced to pay more as a result of the market monopolization by the government and the decrease in productivity by the automakers, and because they will also be paying more in taxes and other costs to subsidize the very vehicles they may not wish to buy. Automakers suffer because they will be forced to compete in a stacked game against an opponent that has no compunction about destroying their businesses in order to become 'profitable.' Ordinary workers suffer because, in the long run, they will lose more jobs from Toyota, Ford, Honda, and the rest than will be saved by government subsidy of GM. The bottom line is that only one group gains from this particular transaction, but the answer to that is so obvious that it need not be stated.