Global Strategy - blog

Facing the "need" to bailout the country's Finance Industry as well as Auto Industry, politicians and industrymen in the US are puzzled over an important question: To which direction one should next take the industry corporations, as the bailout monies effectively give the government control over them ? This debate is -- for sure -- interesting also to other national governments which are struggling with their own finance and other industries (such as that of Finland with its pulp & paper industry).

With both industries, the US government is driving itself into a situation whereby it is de facto nationalizing some of the major corporations of the industries.  For instance in the Finance industry, a great degree of nationalization has in fact already occurred with e.g. Citigroup and Bank of America, due to the enormous amounts of government money that has been injected to these corporations. The government has been trying to conceal the nationalization by structuring the latest deals to take other forms than purchases of preferred or common stocks -- but this does not change the fact that national government is now by and large in control of the corporations (see e.g. NYTimes article on this issue).

Being in the course of nationalizing some of the country's major corporations is a fact that presents, per se, a great ideological challenge to the US government -- known as the first and foremost advocate of free-market capitalist policies in the world.

In addition, there is also the further challenge of what to do next with the corporations that the government now controls; to which direction to take them? Whereas the Finance industry corporations are perhaps trusted to find themselves out of the crisis as soon as enough capital has been injected and assured to them, the case with the domestic Auto industry is even more complicated. Among others, Ralph Gomory, a renowned industry scholar, makes this point in his recent writings (post 1 and post 2).

Namely, the quickest -- and probably the only -- way to heal the Auto industry corporations and make them viable again is to quickly outsource the majority of the corporation's remaining US operations abroad. This way the corporations would get rid of the historical burden of skyhigh labor and other contracts that they have in the home country -- and become profitable again in approximately two years. However, this solution -- even if certainly fixing the problems of the corporations -- would be somewhat detrimental to the employment and GDP domestically.

In effect, the government does not have a slightest idea of what to do next. Do they want to heal the corporations and make them viable and profitable again? Or, do they want to ensure that the corporations keep providing (over-)rewarding jobs in America, that they keep contributing maximally to the domestic production output (GDP), and that they keep sustaining domestic technical capabilities that support the country's military?

Practically, the answer cannot be yes to both (or all) of these questions. It all comes down to the ideological and practical issue of what the core national interests are in the short and long run. In today's globalized and interconnect world, the answer is far from simple -- at least not for politicians. (Actually, I pondered this question already a couple of years ago, in a column in Helsingin Sanomat).