CEI’s FTC Complaint Against GM: A Response to Walter Olson

by Fred Smith on May 12, 2010 · 6 comments

in Bailout Watch, Economy, Legal, Regulation

Over at Cato@Liberty, Walter Olson criticizes CEI’s filing of an FTC complaint against General Motors regarding a recent television advertisement by the company. GM’s ad stated, “we have repaid our government loan in full with interest five years ahead of the original schedule.”

Walter and CEI agree that since GM’s alleged loan “repayment” was financed not by the company’s privately-raised (non-coercive) capital but by a separate pot of government money, the GM ad was quite disingenuous. Since the FTC has a long history of jumping on private firms for similarly misleading ads, and since exposing hypocrisy is one of the most effective methods of undermining the Leviathan, CEI decided to petition the FTC to take action against GM for its deceptive ad.

When GM was bailed out by the U.S. government a year and a half ago, the company’s reputation took a severe hit. GM sales plummeted as taxpayers reacted with fury to the bailout. Indeed, as Ed Whitacre, GM’s CEO, noted in the TV ad: “A lot of Americans disagreed with giving GM a second chance. Quite frankly, I can respect that.” GM’s ads were intended to restore the company’s tarnished reputation, presumably in hopes that GM automobile sales would increase as a result. Had GM actually repaid its government loan in full, thereby reducing its fiscal burden on American taxpayers, such an announcement would have been welcome news to us (and, presumably, to Walter as well).

But, of course, GM did not. Instead, GM “repaid” some of its bailout obligations by employing an old gimmick and transferring funds from one pot of taxpayer funds to another. (Budget gimmickry is one of the many problems of Washington; it has now expanded to government-dependent companies like GM.) Of course, we at CEI, Walter, and many other Americans wish that GM’s status as a de facto Government Sponsored Enterprise (GSE) would end. But distorting what actually happened is no way to achieve this goal.

Nor do CEI or Walter have any illusions about the factual content of the GM ad. GM is a bastardized creation of the modern welfare state. GM has become a large state-capitalist enterprise in which the management and unions have adopted non-sustainable pension, business and marketing practices with the assurance that if anything goes wrong, they’ll be bailed out by taxpayers. Much like Fannie and Freddie, GM epitomizes the challenge posed by crony capitalism to economic liberty. With GM, the boundary between the coercive power of the state and the voluntary, risk/reward feature of capitalism has been blurred beyond recognition. This is not your grandfather’s Free Market!

Crony capitalism endangers the legitimacy of capitalism, the free market, and economic liberty. Indeed, over the last two years, most (if not all) free market advocates have encountered the question, “How can you defend capitalism after the bailouts?”

Walter would probably agree with much of this, but nevertheless, he argues that CEI’s petition is a mistake. He worries that our complaint might set a precedent enabling the FTC to become even more aggressive in policing private firms’ commercial speech.

We doubt it-and with good reason. We have occasionally petitioned government agencies in the past without increasing the regulatory burden of government, but effectively making some important points in the process. The FDA didn’t pay much attention to our 1995 petition asking that agency to regulate coffee and colas as “caffeine delivery devices.” (We argued that they met the same criteria the agency had used to regulate cigarettes as “nicotine delivery devices”, though we did make it clear that we did not actually advocate FDA regulation. We were skeptical that the FDA wanted to take on the coffee and cola drinkers of America. We were right. Though, of course, that might not be true of today’s FDA.)

In 1999, we petitioned the FTC, asking the agency to investigate a deceptive Ben & Jerry’s ad campaign, which touted the “dioxin-free” nature of its new ice cream packaging. The ads talked about how toxic dioxin was, claiming that there was no safe level. But they made no mention of the fact that essentially all animal fats, such as the dairy products in ice cream, contain dioxin. (In fact, as a super-premium ice cream, Ben & Jerry’s is especially rich in butterfat and actually has more dioxin than most ice creams!) In this case, the FTC didn’t have to act, because Ben & Jerry’s dropped its claim.

Still, asking government to intervene in the market is always risky. We should (and do) take that risk very seriously before petitioning a federal agency. But, while Walter seems concerned mainly with governmental threats to commercial speech, other economic liberties are perhaps at even greater risk in this “Crisis of Capitalism” era.

Walter points out that “despite [GM's] current dependence on government, GM is in every relevant legal sense a private company.” That’s true. But, while Walter and CEI both defend commercial free speech rights (see, for example, CEI v. Department of Transportation, 856 F2d 1563 (D.C. Cir. 1988)), Walter neglects how the mission of advancing economic liberty is undermined by GM’s claims that its government bailout was almost costless (“Repaid in full with interest, five years ahead of the original schedule”).  This is a common refrain often echoed by opponents of economic liberty in defending government bailouts and takeovers of private firms. Indeed, it was the primary argument of both Bush and Obama in defending the transformation of large swaths of the Fortune 500 into protected state-corporations in our new “Too Big To Fail” corporatist state.

The growth of the “mixed economy” has been a major defeat for all defenders of economic liberty. It poses a threat far greater than attacks on commercial free speech. For too long, political entities have been shielded from the burdens on the private sector created by the regulatory state. Although we do not intend to downplay the very real threat posed by commercial speech restrictions, we nevertheless believe that requiring government to obey the same laws it imposes on genuinely private entities is an important means of disciplining the Leviathan. Thus, we petitioned the FTC to apply the same rules that already handicap private firms to GM, a majority state-owned enterprise.

Does Walter think liberty is advanced by freeing government from the regulations it imposes on others? CEI sees its mission as defending economic liberty, the free market, and the ever-shrinking private sector. We see no need to protect Government Motors or Fannie and Freddie or the other GSE hybrids that increasingly dominate our economy. If we are to effectively counter political control of the economy, shouldn’t we seek at least policy neutrality?

We doubt that our petition, even if addressed, would encourage the FTC to intensify its attacks on private business. Still, if the FTC were to divert resources from attacking genuinely private firms to state-owned corporations, it would be a very good thing (even regulators can’t destroy everything at once). But we do view crony capitalism, the partial nationalization of great swaths of our economy, and the bailouts as the greater threat to economic freedom. All this has discredited capitalism – “You libertarians keep arguing that capitalism works. How then can you defend GM?”

Moreover, I doubt Walter believes that allowing government to enact new laws and regulations while exempting itself is a useful means of advancing freedom.

Exposing government hypocrisy is an effective means of advancing economic liberty. That was one purpose of our petition, and the media got our point. A Google search shows that our FTC complaint encouraged nearly 100 news outlets and many more websites and blogs to publish articles on the subject. Most of these articles discuss at length GM’s misleading statements and highlight the crucial fact that GM remains on the taxpayers’ dole. Undermining public support for nationalization of struggling firms is an essential ingredient in advancing economic liberty. While our method in this case certainly entailed some risk, we believe these risks are far outweighed by the clear benefit of shining the spotlight on GM’s status.

Walter also argues that libertarians should be reluctant to appeal to the questionable authority of the FTC (or any political entity). Like Walter, we do view the FTC as being far too quick to treat any questionable statement by a private firm as fraudulent. And we share Walter’s disdain for the FTC’s overbroad powers. We would prefer that the agency possess only the power to police speech by private actors in narrow instances in which there is clear evidence of consumer harm.

In this case, though, the misleading statement was perpetrated by an entity that is majority-owned by the Treasury Department. The issue at hand involves not a private firm, but a state-owned enterprise claiming it isn’t one. While Walter is correct in noting that this distinction may not matter in a court of law, it matters very much in the political arena. Bill Niskanen once argued that the political process is more likely to approximate a free society when bureaucracies compete with one another, when “faction checks faction.” Environmentalists and even the EPA questioning the environmental impact of ethanol is one example; the FTC challenging misleading statements by General Motors would be another. Walter doesn’t address our serious concerns about the today’s bailout culture and its detrimental impact on the moral foundation of the free market. And, of course, neither CEI, nor Walter (I suspect) accept the view that “bailouts are OK because eventually the taxpayer will be fully repaid.”

Walter’s implicit distaste for using government to promote liberty reminds me of the old folk story of the man walking in the woods who stumbles across a snake and grabs a “stick” which turns out to be a rattler! We acknowledge that action on the front lines of public policy debates often entails risks that theorists need not face.  Like wartime armies, a tactical decision to storm one hill can result in casualties. But the battles for political and economic freedom cannot be waged with theory alone.  Deregulation and other economic liberalization efforts sometimes require that political tactics be used to curb the power of government. The most successful example of this might be deregulation of freight rail. This was a messy and decidedly imperfect liberation effort, necessitating compromise, but it undoubtedly expanded the sphere of free enterprise.

We all pine for that one decisive battle that would restore the American Dream. In reality, however, we have the far less glorious – but essential – task of taking on the pick-and-shovel work of government reform – chipping away, one stone at a time, the monolith of government. In that battle, selective and intelligent use of the apparatuses of government is critical.

It is good, as Walter suggests, that we are skeptical of using government to weaken government – that process can often go astray. Walter’s constructive criticism is welcome, and I hope it continues. But our task is to determine whether a specific policy would represent a step toward economic liberty, a step away, or lead us into a cul-de-sac that would make further economic liberalization more difficult. This requires that we consider not only the principles that Walter (and we) espouse, but also the changes such partial steps would create in the power balance between the forces of freedom and statism. Admittedly, this is not an easy task. But CEI is dedicated to moving America toward the goals that excellent libertarian think tanks like Cato articulate so well. Our efforts, we believe, are a crucial complement to the work of groups like Cato. Thus, while I admire Walter’s work immensely, I do believe that CEI was right to petition the FTC.

Me May 12, 2010 at 3:39 pm

Why do you concede his claim "that 'despite [GM's] current dependence on government, GM is in every relevant legal sense a private company.'"??

It's a government-owned company! (more than half government owned) Not a privately-owned company!

Didn't the Supreme Court say that Amtrak is the government (despite being nominally private) because the government owns it? (See the Lebron decision)

Didn't Chief Judge Posner hold in one of his opinions (the Creek decision) that government entities have no free speech rights?

Ryan R May 12, 2010 at 4:58 pm

Reread the Lebron decision: http://supreme.justia.com/us/513/374/

The Court said that while Amtrak isn't immune from Constitutional protections, it is not governed by any laws created by Congress (i.e. APA) that apply to government agencies. The FTC Act, which is the source of FTC's authority to police deceptive practices, was enacted by Congress. GM is a "corporation" engaged in "commerce" as defined by the FTC Act (http://www.law.cornell.edu/uscode/15/usc_sec_15_00000044—-000-.html).

Above, the term "relevant legal sense" refers to a precedent potentially set by CEI's complaint that might apply to private companies. If CEI's objection to GM raised a Constitutional question, then it would be wrong to state that GM is private in a "relevant legal sense.' But since CEI's objection is that GM violated Section 5 of the FTC Act, any precedent set in a ruling about what constitutes "unfair or deceptive acts or practices" would apply to all corporations, whether partially-government-owned or not.

Detfan May 13, 2010 at 4:32 am

Let's say I open a $6.7B line of credit from TARP for a large construction project, because the liquidity of my company is low. But as my company moves forward, I find that suppliers costs are lower, and I can due without several employees, and I find that I don't need the full 6.7B, so I pay $1B back. So, then lets say that my liquidity position improves further, so I pay another S1B back. Now lets say, that my existing real estate projects, have all increased their occupancy rates go from 82% to 94%, and liquidity is growing dramatically, so I pay the rest of the "loan" off. Did I use my money? No. Did I pay off the loan with the loan money I received? Yes. Is that some type of problem? No. I advertise that I've paid off my Government loan, so possibly I can get another couple projects to work on. Well, geez, that's what GM did!! All loans have been repaid. The only thing left is the governments equity position, and GM will be doing an IPO that will go a good way toward adding up to the value of the equity that the governments position equals. I see no foul. I just see conservative politicians and conservative think tanks trying to spin GM negatively so the stink will land on our President and Democratic Congress.

It is going to backfire, unfortunately, because, as I am also a conservative Republican, that see's GM as a privately held company and taxpayers that have been made whole in the not too distant future. The taxpayers, actually, made $700,000,000 on the $6.7 billion loan to GM already. The IPO could also provide a windfall, and thats when the conservatives that have tried to smeer GM to smeer the President and Democratic Congress will have egg on their face.

Too bad, too. We are in such good position for a new conservative leadership in this Country, that this issue will cast doubt on the motives of Republican leadership.

Joe May 15, 2010 at 4:30 am

I was appalled at GM's commercial and thought it was obscene–and i'm happy to see that i'm not the only one and that CEI is doing something about it to address the propoganda from Obama. I think it was impossible for the casual observer to not be mislead that the Company had repaid everything it owed back to the taxpayer. And it was impossible to miss the commercial if you watched any TV several sundays ago. It aired during every single sunday morning talk show, on every major network, and continued throughout the rest of the day. Convenient timing for Mr. Obama, considering he wants banks to pay for the TARP losses caused by the bailouts of the UAW, it certainly helps his position if he can mislead people to believe that the UAW did not cause any losses to TARP and only Banks did, and therefore only banks should pay.

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