The Ethical Case for Boycotting Chrysler and GM

In business ethics, the typical way one makes a judgment about the morality of a business action or practice is to consider the facts surrounding it in the light of four major ethical perspectives. These four ethical theories have been the ones considered most plausible in over two millennia of moral philosophy.

The first perspective is the natural rights view, or what I will call the (A) rights perspective. This view judges an action or practice by asking whether it flows from the rights of those doing it, and more importantly, if it violates the rights of others.

The second perspective is the (B) consistency perspective. This view judges an action or practice by asking what would happen if it were done or practiced by everyone, not just those involved in this situation. It is the view expressed by the Golden Rule, a rule common to most major religions.

The third perspective is the (C) virtue perspective. This view asks whether the action or practice corrupts or enhances people's characters.

The fourth perspective is the (D) utilitarian perspective. This view looks to the consequences that will likely flow from the action or practice, and judges it right to the degree those consequences are the best for society over the long term.

I will argue that the unprecedented action by the current administration in manipulating the bankruptcies of Chrysler and GM, and in effect nationalizing the companies, is egregiously unethical by every one of these major ethical perspectives. For this reason, I believe that this action makes it morally imperative for Americans to boycott these socialized companies.

Consider first the facts. In these two cases, rather than let the free market and the legal system (specifically, the bankruptcy court) handle the reorganization of the failing auto makers in the normal way, the Obama administration spent tens of billions in taxpayers' dollars to take control of the companies and force the outcome it wanted. Obama, who received millions in contributions from the United Auto Workers union, has forced a settlement that will give UAW far more equity in the companies when they come out of bankruptcy than it was due compared to the secured debt holders.[i] Obama's agents used threats and intimidation (calling holdout bondholders speculators and hedge funds at one point) to get the creditors to accept being shafted. (WSJ.com 5/11/09)The result is that the vast majority of the two companies will be almost clearly owned by the federal government and the UAW, and the UAW arguably controls the federal government.

The result is drenched in irony. The UAW was a major reason why the companies hit the wall, and now the UAW will be rewarded with major control and ownership. It is as if a rape victim were forced to marry her rapist. The result makes the crony capitalism we saw in Russia look clean by comparison; it, at least, was a kind of capitalism.

This situation is ethically repugnant form every perspective. Consider the facts from the (A) rights perspective. The secured creditors' rights to a just settlement have been completely violated. And these bondholders, despite the defamation of Obama and his myrmidons, are not just soulless capitalist speculators. They include regular folk, yes, and even some even blue collar workers, who held these assets as part of their retirement portfolios. (WSJ.com 5/27/09). It also included teacher and police pension funds, and state infrastructure construction funds. (WSJ.com 5/21/09)

The rights of all the stakeholders at the competing car companies have been violated as well. Their workers, stockholders, and managers will now be compelled to pay taxes that will fund their competitors. Consumers of other car companies will wind up paying taxes to build the very cars they chose not to buy. And taxpayers with no health insurance will pay to maintain the sweet health benefits of UAW members.

From the (B) consistency perspective, the nationalization of Chrysler and GM seems obviously wrong. By using his political power, Obama has forced the bankruptcy court to put aside longstanding settled principles, especially the rule that secured creditors get priority in receiving assets from a defunct entity. Worse yet, Obama abused his power to benefit his supporter and benefactor, the UAW. What if every president did this sort of thing? Would any legal system that gave citizens equal protection under the law even be possible? Hardly.

From the (C) virtue perspective, again we see that the nationalization is unacceptable. It will corrupt unions and businesses alike, by leading them to negotiate obviously unsustainable contracts, safe in the knowledge that by paying off the pols the federal government will step in to save them from the consequences of their dishonesty.

Finally, from the (D) utilitarian perspective, the forced nationalization of the auto industry is unethical. We are seeing just the start of the negative consequences that will flow from this act of statist hubris.

To start with the obvious, even though Obama denies that he will manage the companies, we have all learned by now that he has no problem doing the very thing he is denying. (In ordinary life this political artfulness is called lying). He fired one CEO, forced Chrysler to accept Fiat (WSJ.com 6/5/09), told GM that it cannot move its headquarters out of Detroit (WSJ.com 6/3/09), and may have ordered that whoever buys GM's European auto maker Opel must agree not to export cars to the U.S.. (WSJ.com 6/1/09) These decisions were made in secret with no Congressional oversight, by a man with no training or experience of any kind in business, never mind the auto business.

The companies will be run by politicians, who will make decisions for the benefit of political agendas rather than on sound business principles. The result will be that the auto companies and the union will not make the deep changes required to make the companies profitable, so we can anticipate many more cash infusions.

Worse yet, we can foresee that now that the UAW and feds have control of Chrysler and GM, they won't stop there. Their natural instinct will be to achieve monopolistic control. The UAW has helped drive Chrysler and GM to the wall and is now co-owner with the government of most of the equity. They will likely next target Ford, to get equity ownership of it. Then look for the UAW and the administration it controls to attempt to force the employees of foreign auto makers in this country to join the UAW, or use environmental and other regulatory laws to put those companies out of business.

But the negative consequences will spread well beyond the auto industry. By so conspicuously stiffing the bondholders in favor of his political supporters, Obama has made raising capital vastly more difficult. Every investor now knows that past bankruptcy law means nothing; if the President is paid enough by some special interest group, he will rip off the secured debt holders to satisfy his supporters. This will surely lower the demand for corporate bonds, leading to less capital for business expansion, hence fewer jobs.

We have in this debacle an ironic illustration of what the economist Frederic Bastiat warned us about in his classic essay, "The Seen and the Unseen." What Obama hopes we will see are the thousands of UAW jobs saved. What he knows we won't see are all the jobs that will be lost or not created because of his dictatorial conduct.

The citizenry needs to make it clear this nationalization will not be permitted to succeed. We need to boycott these companies, and tell this rogue administration exactly what we are doing. The alternative is that they will do this again.

Gary Jason is a contributing editor of Liberty, and an instructor of business ethics.


[i] In the case of GM, the bondholders likely will get 10% of the common stock in the reorganized company for the $27 billion they are owed. The UAW will get $10 billion in taxpayer cash, plus 17.5% of the new company's common stock, $2.5 billion in bonds, and $6.5 billion in new preferred stock, paying a 9% dividend, all for the $20 billion it is owed. (WSJ.com 6/1/09) In the case of Chrysler, the bondholders will get $2 billion in cash for the $6.9 billion they are owed, with no equity. The UAW will get 55% of the new company, for "forgiving" $6 billion in promised retiree health care-really, just unsecured debt that would have been in second place in a proper bankruptcy. (WSJ.com 5/1/09).
In business ethics, the typical way one makes a judgment about the morality of a business action or practice is to consider the facts surrounding it in the light of four major ethical perspectives. These four ethical theories have been the ones considered most plausible in over two millennia of moral philosophy.

The first perspective is the natural rights view, or what I will call the (A) rights perspective. This view judges an action or practice by asking whether it flows from the rights of those doing it, and more importantly, if it violates the rights of others.

The second perspective is the (B) consistency perspective. This view judges an action or practice by asking what would happen if it were done or practiced by everyone, not just those involved in this situation. It is the view expressed by the Golden Rule, a rule common to most major religions.

The third perspective is the (C) virtue perspective. This view asks whether the action or practice corrupts or enhances people's characters.

The fourth perspective is the (D) utilitarian perspective. This view looks to the consequences that will likely flow from the action or practice, and judges it right to the degree those consequences are the best for society over the long term.

I will argue that the unprecedented action by the current administration in manipulating the bankruptcies of Chrysler and GM, and in effect nationalizing the companies, is egregiously unethical by every one of these major ethical perspectives. For this reason, I believe that this action makes it morally imperative for Americans to boycott these socialized companies.

Consider first the facts. In these two cases, rather than let the free market and the legal system (specifically, the bankruptcy court) handle the reorganization of the failing auto makers in the normal way, the Obama administration spent tens of billions in taxpayers' dollars to take control of the companies and force the outcome it wanted. Obama, who received millions in contributions from the United Auto Workers union, has forced a settlement that will give UAW far more equity in the companies when they come out of bankruptcy than it was due compared to the secured debt holders.[i] Obama's agents used threats and intimidation (calling holdout bondholders speculators and hedge funds at one point) to get the creditors to accept being shafted. (WSJ.com 5/11/09)The result is that the vast majority of the two companies will be almost clearly owned by the federal government and the UAW, and the UAW arguably controls the federal government.

The result is drenched in irony. The UAW was a major reason why the companies hit the wall, and now the UAW will be rewarded with major control and ownership. It is as if a rape victim were forced to marry her rapist. The result makes the crony capitalism we saw in Russia look clean by comparison; it, at least, was a kind of capitalism.

This situation is ethically repugnant form every perspective. Consider the facts from the (A) rights perspective. The secured creditors' rights to a just settlement have been completely violated. And these bondholders, despite the defamation of Obama and his myrmidons, are not just soulless capitalist speculators. They include regular folk, yes, and even some even blue collar workers, who held these assets as part of their retirement portfolios. (WSJ.com 5/27/09). It also included teacher and police pension funds, and state infrastructure construction funds. (WSJ.com 5/21/09)

The rights of all the stakeholders at the competing car companies have been violated as well. Their workers, stockholders, and managers will now be compelled to pay taxes that will fund their competitors. Consumers of other car companies will wind up paying taxes to build the very cars they chose not to buy. And taxpayers with no health insurance will pay to maintain the sweet health benefits of UAW members.

From the (B) consistency perspective, the nationalization of Chrysler and GM seems obviously wrong. By using his political power, Obama has forced the bankruptcy court to put aside longstanding settled principles, especially the rule that secured creditors get priority in receiving assets from a defunct entity. Worse yet, Obama abused his power to benefit his supporter and benefactor, the UAW. What if every president did this sort of thing? Would any legal system that gave citizens equal protection under the law even be possible? Hardly.

From the (C) virtue perspective, again we see that the nationalization is unacceptable. It will corrupt unions and businesses alike, by leading them to negotiate obviously unsustainable contracts, safe in the knowledge that by paying off the pols the federal government will step in to save them from the consequences of their dishonesty.

Finally, from the (D) utilitarian perspective, the forced nationalization of the auto industry is unethical. We are seeing just the start of the negative consequences that will flow from this act of statist hubris.

To start with the obvious, even though Obama denies that he will manage the companies, we have all learned by now that he has no problem doing the very thing he is denying. (In ordinary life this political artfulness is called lying). He fired one CEO, forced Chrysler to accept Fiat (WSJ.com 6/5/09), told GM that it cannot move its headquarters out of Detroit (WSJ.com 6/3/09), and may have ordered that whoever buys GM's European auto maker Opel must agree not to export cars to the U.S.. (WSJ.com 6/1/09) These decisions were made in secret with no Congressional oversight, by a man with no training or experience of any kind in business, never mind the auto business.

The companies will be run by politicians, who will make decisions for the benefit of political agendas rather than on sound business principles. The result will be that the auto companies and the union will not make the deep changes required to make the companies profitable, so we can anticipate many more cash infusions.

Worse yet, we can foresee that now that the UAW and feds have control of Chrysler and GM, they won't stop there. Their natural instinct will be to achieve monopolistic control. The UAW has helped drive Chrysler and GM to the wall and is now co-owner with the government of most of the equity. They will likely next target Ford, to get equity ownership of it. Then look for the UAW and the administration it controls to attempt to force the employees of foreign auto makers in this country to join the UAW, or use environmental and other regulatory laws to put those companies out of business.

But the negative consequences will spread well beyond the auto industry. By so conspicuously stiffing the bondholders in favor of his political supporters, Obama has made raising capital vastly more difficult. Every investor now knows that past bankruptcy law means nothing; if the President is paid enough by some special interest group, he will rip off the secured debt holders to satisfy his supporters. This will surely lower the demand for corporate bonds, leading to less capital for business expansion, hence fewer jobs.

We have in this debacle an ironic illustration of what the economist Frederic Bastiat warned us about in his classic essay, "The Seen and the Unseen." What Obama hopes we will see are the thousands of UAW jobs saved. What he knows we won't see are all the jobs that will be lost or not created because of his dictatorial conduct.

The citizenry needs to make it clear this nationalization will not be permitted to succeed. We need to boycott these companies, and tell this rogue administration exactly what we are doing. The alternative is that they will do this again.

Gary Jason is a contributing editor of Liberty, and an instructor of business ethics.


[i] In the case of GM, the bondholders likely will get 10% of the common stock in the reorganized company for the $27 billion they are owed. The UAW will get $10 billion in taxpayer cash, plus 17.5% of the new company's common stock, $2.5 billion in bonds, and $6.5 billion in new preferred stock, paying a 9% dividend, all for the $20 billion it is owed. (WSJ.com 6/1/09) In the case of Chrysler, the bondholders will get $2 billion in cash for the $6.9 billion they are owed, with no equity. The UAW will get 55% of the new company, for "forgiving" $6 billion in promised retiree health care-really, just unsecured debt that would have been in second place in a proper bankruptcy. (WSJ.com 5/1/09).