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Down with the Car Czar!

Commentary: History is rife with the bumblings of government management of business. Get ready for more.

By Brian Dumaine
December 18, 2008: 4:12 AM ET

NEW YORK (Fortune) -- With the idea of a "car czar" the flavor-du-jour in our nation's capital, it looks like we're destined to repeat history and with unhappy consequences.

In exchange for bailout money, lawmakers seem eager to appoint a bureaucrat who will oversee the business of GM (GM, Fortune 500), Chrysler and Ford (F, Fortune 500). OK. But what does House Speaker Nancy Pelosi or any other politician know about running an auto company?

Democrat leaders outright rejected candidates such as former GE CEO Jack Welch who knows how to run an industrial powerhouse as well as Mitt Romney who created Bain Capital and knows a bit about turning around troubled companies.

Instead, Pelosi suggested Paul Volcker, a former Federal Reserve chairman and now an economic adviser to President-elect Barack Obama, would be a good choice. Volcker may have been a brilliant fed chief, but one should be wary equating the skills of a government bureaucrat with industry savvy.

Unintended consequences can arise when the public sector moves into the private.

Take what happened during the Great Depression. F.D.R., created the National Recovery Act (N.R.A.) because he thought armies of bureaucrats would know how to make business more competitive. In a 1934 case, the courts fined and sentenced to jail four brothers who ran a butcher shop, for, among other charges, allowing their customers to pick the chickens they wanted. An N.R.A. code prohibited "straight killing," which meant that that a butcher had to reach into the coop and pull out the first chicken he laid his hands on -- really.

In the twisted logic of the N.R.A., letting your customers have want they want would give your store a competitive advantage over other small businesses and that would be bad for the economy. The brothers appealed the case all the way to the Supreme Court, which overturned the verdict, essentially putting an end to the N.R.A. Market order was restored: customers could select their own fowl. In "The Forgotten Man: A New History of the Great Depression" author Amity Shlaes cites a Brookings Institution report from the time: "The N.R.A. on the whole retarded recovery."

Bumbling is not limited to Washington bureaucrats. In Japan, the Ministry of International Trade and Industry (MITI) was once one of the most powerful agencies in the government. At the height of its influence in the 1980s, it effectively ran much of Japanese industrial policy, funding research and directing investment. Over the years, however, MITI had a less than stellar record of picking business winners.

In the 1950s, MITI bureaucrats attempted to prevent a small firm from acquiring manufacturing rights from Western Electric to produce semiconductors. The firm persisted and was eventually allowed to acquire the technology. That firm turned out to be Sony. Thirty years later MITI planners tried to keep Honda from producing cars and stick to motorcycles -- a close call for all future Accord drivers.

If Washington does insist on a car czar, at least let it be someone like Welch or Romney who has big business experience and can wisely oversee an orderly restructuring of the Big Three. And if certain Democrats want Detroit, as part of the bailout package, to build greener, more fuel efficient cars, let market forces, not bureaucrats, do the job. As Fortune has pointed out in its pages, GM already builds at least 30 models that get more than 30 miles per gallon on the highway. Cheap gas for most of this decade made car buyers not want them. With Gasoline now under $2 a gallon, many of Detroit's customers will start to drift back to gas-hogging SUVs and pickups. A tax on gas that would raise the price to $4 a gallon and would be revenue neutral -- every dollar raised would go right back into American's pockets through tax cuts -- would make hybrid and electric cars the popular choice. And Detroit could rebuild itself by meeting that new demand. To top of page

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