Government's role in economy getting too big?

The US government is undertaking a historic expansion of its role in American industry with interventions that are economically risky, even as it aims to cushion America from a deep recession.

Chrysler’s bankruptcy filing last week underscores the depth of the federal government’s involvement in some of the biggest names in American business, from General Motors to Citigroup.

Neither President Obama nor President Bush before him espoused any desire to run car companies or banks. But the federal role is rising all the same, based on the concern that the failure of vital companies could cause lasting damage to the economy.

Collectively, the actions mark a level of government involvement in managing the economy not seen in decades, some economists say. The dangers are significant. The government could delay rather than speed up the revival of these industries. Bailout costs could burden the US economy for years to come.

At the very least, federal intervention creates an element of doubt among key actors in the marketplace as businesses and investors struggle to predict what the government will do next.

“This creates huge uncertainty,” says Dan Ferris, an editor at Stansberry & Associates Investment Research in Baltimore. “The whole nature of TARP [Troubled Assets Relief Program] from the beginning has been this moving target.”

 Negative consequences

By way of example, he suggests that efforts to save industries in the short run might have negative consequences in the longer term.

To pave the way toward more government aid for GM and Chrysler, an Obama administration automotive task force has been brokering deals with creditors, workers, and retirees – trying to win concessions from all of them.

But the bondholders, for one, argue they’ve been offered a bad deal. Seeking what they see as a fairer deal, Chrysler’s bondholders have pushed the process into bankruptcy court.

Mr. Obama’s bid to save jobs at the carmakers risks inadvertently sending a signal to creditors nationwide: Invest at your own risk, Mr. Ferris says. If that’s the message that emerges from the bankruptcy proceedings at Chrysler, companies in other industries would have a harder time raising funds.

At some point, Ferris adds, the way to get the economy moving again is for the government to “just back off.”

Walking the line

The debate is complicated. While many economists are concerned about government intrusion in the marketplace, many also say that without some large interventions, the current recession would be much deeper.

Obama has been trying to walk a careful line, avoiding interventions when possible. Yet the government may remain involved automaking and banking for years to come.

“You know, I don't want to run auto companies. I don't want to run banks,” Obama said in a recent press conference. “I've got more than enough to do. So the sooner we can get out of that business, the better off we're going to be.”

Once voters and taxpayers effectively have a large ownership stake in corporate America, it can be hard for politicians to avoid putting their hand on the steering wheel.

At car companies, Obama and Congress are calling for Detroit to become the global leader in energy-efficient vehicles – a goal that could run counter to a speedy return to profitability.

At banks, federal aid comes with close scrutiny. Lawmakers want to make sure that money from the TARP fund is used for loans, not managerial bonuses.

Some economists worry this effort could have unintended consequences.

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