“We Own GM” and Other Rhetorical Illusions
posted by Lawrence Cunningham
Misleading talk continues to plague discussions of government’s financial intervention into private enterprise, including automotive, insurance and banking companies. Latest talk, centered at General Motors but applicable to AIG, Citigroup and others, is misuse of three abstract notions: taxpayer, ownership and investment.
Standard talk sees US government’s capital transfers from the federal purse to private corporations as resulting in “taxpayers owning investments” in these companies. The upshot of this speech is the illusion that (a) people who pay US federal income tax (b) now own a bit of these corporations and (c) are entitled to enjoy investment return from that. All these conceptions are misleading. Clinging to them will complicate the process of government rescue and revival at the heart of this effort.
First, funding for government capital transfers is provided only in part by mandatory tax payments by persons subject to US taxation; a large portion of the federal government’s current budget is obtained by borrowing. A sizable part of this debt financing is owned by the Chinese government. When significant federal budget deficits persist, it is misleading to say government capital infusions into private enterprises are being made “by the American taxpayer.” It would be more accurate to say “by US creditors and the American taxpayer.”
Second, what ownership interest does any taxpayer (or creditor) have? Ownership designates a bundle of interests or rights, the most exquisite the rights to control and dispose. No taxpayer has remotely any such interests or rights, directly or indirectly, either in funds sent to Washington or from any allocation of those to corporate enterprises. Taxpayers own interests in GM as much as they own interests in I-95, Amtrak, Medicare and the White House. It is misleading to say American taxpayers own much of anything in GM.
Third, the purpose of the funding resulting in the interest is not investment in the pertinent sense of providing financing for economic return, accepting associated risks. None of government’s decisions in relation to GM or other failing companies has remotely any such motivation. The purpose and goal is to rescue companies and their role in US industry and economy. It is financial aid. This has nothing to do with investment in its traditional sense and it is misleading to speak otherwise.
Such misleading talk is costly because resulting illusions complicate the inherently difficult task of unwinding all this involvement. Consider what is happening with bank recipients of federal funds now seeking to repay them, including warrants government has to buy bank stock. An issue is how much banks should pay to redeem the warrants. Talk turns to how “taxpayers” need “return on investment” in the warrants they “own.”
But this is hokum. Treasury should cut a pragmatic deal with the banks and redeem warrants for responsible consideration. But negotiations should not pretend that Treasury is acting on behalf of taxpayers who own the warrants and expect a fair return.
GM is getting funding as federal aid. It is an ailing business seen as important to US national economic interests. The funding is not an investment, no reader of this post has any ownership in it, and none should have any expectation of any return on investment. At best, the funding will enable GM to right itself. No one should expect anything more.
The mainstream press should find other shorthand terms to translate these funding arrangements into simple sentences that are not misleading.
June 2, 2009 at 10:09 am
Posted in: Corporate Finance, Current Events, Law Talk
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Responses (8)
Patrick S. O'Donnell - June 2, 2009 at 5:47 pm
That was very good: informative and enlightening…thanks.
A.J. Sutter - June 2, 2009 at 6:55 pm
You’re right in a literal sense. But does the “taxpayer” rhetoric serve some reasonable political purpose?
In contexts like this one, “taxpayer” isn’t a neutral word anymore — its connotations have been conditioned by repeated use in contexts suggesting that “government” or a third party is overreaching. As such, it’s kind of a code word suggesting that citizens should pay more attention to what the government (usually, the executive branch) is doing, and to what benefits will result from those actions.
I could be misreading the public mood, but I doubt that people literally expect that they’ll be getting a personal dividend from GM, passed through by the Feds. Or that they’ll be sent proxy materials for shareholder votes. But I do think most people expect that the government represents them in some way, that it acts on behalf of the American people and therefore has an obligation to act responsibly. To the extent “taxpayer” is associated with those expectations, and results in greater scrutiny of the deal by more citizens, then I’m not sure the usage is so objectionable, even if not technically accurate. In this it’s different from other types of politically-motivated doublespeak, which are designed to discourage people from thinking about what’s going on.
Personally I agree that the perspective offered by a phrase like “China and the US taxpayer” is an instructive one, but it’s understandable why the Administration isn’t barking too loudly about that. If they were, don’t you think there would be more of an outcry to let GM die? Where would that leave the workers of GM and GM’s suppliers, and their families? Not doing the GM deal isn’t going to stop us from borrowing from China, in any case.
Brett Bellmore - June 3, 2009 at 4:24 am
There’s another problem: We shouldn’t confuse “taxpayers” with “the government”, they’re distinct entities. Looking at the head of treasury, maybe even disjoint…
Maryland Conservatarian - June 3, 2009 at 5:32 am
“GM is getting funding as federal aid. It is an ailing business seen as important to US national economic interests. The funding is not an investment, no reader of this post has any ownership in it, and none should have any expectation of any return on investment. At best, the funding will enable GM to right itself. No one should expect anything more.”
So when President Obama says: “Understand we’re making these investments not because I want to spend the American people’s tax dollars, but because I want to protect them”
…is he misleading us, just clueless as to the ways of business or talking down to those of us who didn’t go to Harvard Law
Don Gwinn - June 3, 2009 at 6:54 am
In the real world, if you’re the one on the hook to take the loss when it fails, you own it de facto.
TRE - June 3, 2009 at 7:25 am
Unfortunately the profits (heh) will be enjoyed by others Don. Its more like we are silent partners with the mafia.
Lia - June 5, 2009 at 8:25 pm
Great post Prof. Cunningham.
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