Even as it gets set to announce the bankruptcy of General Motors Monday, the Obama administration is struggling to set parameters on how it will act after taking a 60 percent stake in the new company that emerges -- and now that it has become the owner of a significant swath of Corporate America.
The United States "has become the owner of a significant swath of Corporate America"? Really? That has about as much perspective as, um, line drawings before Brunelleschi (or something). So I thought it would be fun to come up with a graphical representation of what the "significant swath" looks like:
The section of the chart that appears in bright, bumblebee yellow is the percentage of publicly traded American companies owned by the United States.* I don't see much bumblebee yellow. What I do see is that Microsoft Excel feels the need to portray the percentage of American companies owned by the government in exponential notation. That's 5.07E-2, or %0.0507 of the value of American companies that is owned by the United States government. (When I ask Excel to display this breakdown without the exponents it just becomes "100%" and "0%.")
In the coming week there will be much debate over what it means for the United States to be the majority shareholder of a major car company. Much of that debate will be serious and interesting. There will also be a lot of talk about how the United States is a socialist country in which the government has nationalized half of what was formerly known as private industry. That debate will be a lot less interesting.
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(*I should have a little note on methodology here: I took the value of all publicly traded companies in the United States, which is available in the CIA factbook. The last data available is from December 31 2007, so I adjusted that value based on the percentage declines of a few major stock indices. I took that value -- about $12.5 trillion -- and subtracted the publicly traded values of the companies the United States owns. I used AIG, General Motors, Fannie and Freddie. I estimated values for a couple of other companies -- Amtrak, the Corporation for Public Broadcasting, the TVA, etc -- and threw them into the mix, too. A little algebra and presto, we have the chart.
If you wanted to be very generous you could use figures other than the publicly traded values for GM and AIG -- the Obama administration certainly thinks GM is worth more than what it's trading for. If you wanted to be even more generous you could add a couple of the big banks that the government is implicitly guaranteeing. I don't think that will substantially change the picture above, but email me or post a comment with any methodological suggestions.)
Update: The commenters have done a pretty great job of pointing out how bad I am at math (please feel free to pile on), so I've updated the post to reflect certain truths about irrational numbers. Whoops.
In the coming week there will be much debate over what it means for the United States to be the majority shareholder of a major car company. Much of that debate will be serious and interesting. There will also be a lot of talk about how the United States is a socialist country in which the government has nationalized half of what was formerly known as private industry. That debate will be a lot less interesting.
----
(*I should have a little note on methodology here: I took the value of all publicly traded companies in the United States, which is available in the CIA factbook. The last data available is from December 31 2007, so I adjusted that value based on the percentage declines of a few major stock indices. I took that value -- about $12.5 trillion -- and subtracted the publicly traded values of the companies the United States owns. I used AIG, General Motors, Fannie and Freddie. I estimated values for a couple of other companies -- Amtrak, the Corporation for Public Broadcasting, the TVA, etc -- and threw them into the mix, too. A little algebra and presto, we have the chart.
If you wanted to be very generous you could use figures other than the publicly traded values for GM and AIG -- the Obama administration certainly thinks GM is worth more than what it's trading for. If you wanted to be even more generous you could add a couple of the big banks that the government is implicitly guaranteeing. I don't think that will substantially change the picture above, but email me or post a comment with any methodological suggestions.)
Update: The commenters have done a pretty great job of pointing out how bad I am at math (please feel free to pile on), so I've updated the post to reflect certain truths about irrational numbers. Whoops.
Well, if you really want to include all of the businesses that the United States owns, you have to include the US Postal Service, Medicare and Medicaid, as well as all of the Public Educational Institutions. I say this because if a there is a private sector competitor with whom the US's entity would compete, I would classify that entity as a business, and hence a "company" to use your term.
That's an interesting point ... but then you would get the same result in the opposite direction, wouldn't you? The presence of the US government would look very large, but it wouldn't change at all after becoming the owner of GM, AIG etc.
and, FWIW, if you go down your slope, I don't think there's any logical stopping point on the way to counting the entire US government vs the entire US economy. in a manner of speaking, the US government "competes" with the private sector in every possible way: government taxation and borrowing competes with the private market for loanable funds; the US government competes with private industry for employees (thus raising the cost of labor), etc.
So maybe it would have been better to cut out Amtrak and Public Boradcasting and just stick to the companies that have publicly traded shares -- ie, Fannie, Freddie, AIG and GM. Then you'd get an even smaller percentage.
But I think the publicly traded companies are what Politico, and most of the people who worry about nationalization, have in mind.
Conor
Medicare and Medicaid are not "businesses". They are not capitalized, and they owe no profit. They're government programs that buy services from regular businesses.
And contrary to public belief, the USPS is a private corporation. They enjoy special government sponsorship, but they are not owned by the U.S. Ditto for Amtrak. Fannie and Freddie used to be this way as well, until they were nationalized in the recent crisis.
I don't see much bumblebee yellow. What I do see is that Microsoft Excel feels the need to portray the percentage of American companies owned by the government as an irrational number.
Um. It's not an irrational number. Irrational numbers are those that can't be expressed as a fraction (i.e. ratio). It's expressed as an exponential number.
wait, isn't euler's number irrational?
Conor Clarke asks:
>>>Wait, isn't Euler's number irrational?
Indeed it is. But the "e" here is not Euler's number (2.71828...); in fact, it stands for 10, so that e -2 stands for
10^-2 (ten to the power of -2)
or 0.01.
Although commenter ech is correct in what he says, it is more accurate to say that an irrational number is a member of the set of all Dedekind cuts. But don't get me started!
;-)
Jamie Irons
The 'e' in this expression just means "exponent." In this case, the exponent is -2, so multiply the number by 10 to the -2 (0.01). You seem to be capable of doing that math yourself, as you convert 5.07e^-02 to 0.0507 in the article.
Conor Clarke asks:
>>>Wait, isn't Euler's number irrational?
Indeed it is. But the "e" here is not Euler's number (2.71828...); in fact, it stands for 10, so that e -2 stands for
10^-2 (ten to the power of -2)
or 0.01.
Although commenter ech is correct in what he says, it is more accurate to say that an irrational number is a member of the set of all Dedekind cuts. But don't get me started!
;-)
Jamie Irons
Yes, Euler's number (the mathematical constant usually abbreviated as e) is an irrational number, but the number in the chart is not Euler's number. Rather it's a plain percentage written in exponential notation. The confusion in this case rises from the fact that exponential notation uses the letter e to indicate a power of ten, but has nothing to do with the constant e.
Sorry for my double post.
And I should have said:
...an irrational number is a member of the set of all Dedekind cuts in Q, the set of rational numbers.
;-)
Jamie Irons
Thanks for the math lesson! I'm going to update the post now.
Conor
Quick comment as I'm out the door: how did you define "owned"?
Let's say, more than 50% ownership stake?
The SEC would define it as 5%, not 50%. Then we get to definitions of "significant swath", which would take into account the rate of growth of the government's percentage and a guesstimate of the effect of the government's swath on those companies not (yet) owned by the government.
Fodder for endless arguments, to be sure, but I'd have to wonder about anyone who isn't at least a little bit worried.
Yes,
The first commenter, who isn't the Business and Economics Editor of The Atlantic, the editor of Atlantic Business or a blogger in her own right, has a much more intelligent point.
And that is that the United States government controls many, many industries. Boeing, for example, America's only manufacturer of large aircraft, is in reality a government company. Owing to its dependence on government contracts it could not survive without billions in US government subsidies.
Boeing has no competitors, because nobody wants to compete against a government-owned company. You can't compete against Uncle Sam. Oh, wait ... it does have a competitor - Airbus, which is owned by the French and British governments.
The US government owns all air traffic control companies; and governments control almost all airports. The government controls all mailboxes in the US. The US government owns the only passenger rail service in the United States. It owns almost all the schools and sets policy in all the nation's hospitals. It operates almost all of the jails (even though this is not required). It operates the only legal lottery system and controls many roads through tolls. It heavily regulates our movements and tries to force us to live in large cities where it can tax us most efficiently.
The US government is the nation's largest employer. Why not do a graph showing all employees in the United States - and separate out all who work for governments of various kinds.
Your posting attempts to imply that only the camel's nose is in the tent. Even a lowly commenter can easily point out that the entire camel's ass is in the tent and pooping everywhere.
And that is that the United States government controls many, many industries. Boeing, for example, America's only manufacturer of large aircraft, is in reality a government company. Owing to its dependence on government contracts it could not survive without billions in US government subsidies.
Sorry but that's ridiculous. Boeing is free to sell to whoever they like. The only reason Boeing sells to the U.S. government is because the U.S. pays their price.
Now let's see if GM and Chrysler (not to mention BA, Citi, and AIG) will continue to enjoy that same freedom.
hmm, so how bout this: You can expand the definition to include "all companies and industries in which the US government has a hand," but the percent change on the chart would still look the same. You might be still be right, and it might be a good point about big government and all that, but it's not a point about policy changes that have come about in the past couple of months. The point of the chart is not that the united states government isn't large; it's just that the United States government hasn't suddenly started nationalizing large swathes of the american economy.
And why this thing about "lowly commenters"? I really like my commenters and think they always have good points to make. So, thanks for the comment!
Conor
What I do see is that Microsoft Excel feels the need to portray the percentage of American companies owned by the government as an irrational number ... When I ask Excel to display this breakdown in real numbers it just becomes "100%" and "0%.
not to further assault your math but the set of irrational numbers is a subset of the real numbers
Hurm. And it would be more useful to produce a figure showing (for example) the share of the ostensibly private sector's workforce now under the control of the government; or the total value added of that government-controlled private sector; or some other figure.
The number of firms owned by the government is not such a useful metric here; firms are a nice organizational unit but the term "firm" gives no insight into size.
and just to be clear, the above chart/percentage calculation is not the number of firms -- it's the percentaqe of the publicly traded value of all american firms, so it should reflect (to some extent) size.
Conor
no no, please continue the assault on my mathematical abilities! it's a good refresher course..
Now let's see a graph that lists businesses that are directly dependent on government for their existence or rely on implicit promises of government assistance should they need it. It would also be interesting to see these charts weighted by asset size. (I would guess leaves the smaller companies alone).
I think the comparison would be illuminating to the discussion of whether or not our economic policy owes more to Marx, Mussolini or Adam Smith.
But what would that chart show about recent economic policy? the point of the graph isn't "America has a tiny government," but "recent policy changes haven't led to the sudden and mass nationalization of American firms."
Mr Clarke,
I agree - that is the point I am trying to make. We are not following the more-Marxist strategy of nationalizing companies. We are following the more-Mussolini-ist strategy of "working with" companies. The Government is still involved in unprecedented levels of economic intervention. Your chart, by focusing only one form of intervention (i.e. nationalization), actually obscures the true level of intervention.
Your chart clearly shows we're not pursuing mass nationalization. Fine, let's all agree on that. But, it says nothing about whether or not the US Government has become more interventionist. Our intervention has not been Marxist, that doesn't mean the intervention is any less scary.
"and subtracted the publicly traded values of the companies the United States owns"
This seems a silly way to to measure the "size" of a company for purposes of the government's impact on American society through its ownership of the companies. The relative equity value of these companies is not at all representative of such impact.
To make this post at all interesting, you should look at something more representative. Revenues, perhaps? Or assets?
Perhaps the best thing to measure would be enterprise value.
Again, though, looking at this purely through the value of publicly traded equity is deeply silly. It's kind of embarrassing that a correspondent for the *Business* channel at The Atlantic would look at it this way.
don't understand why it's embarrassing or silly. (at least, I'm not embarrassed!) the publicly traded value is, by definition, publicly available. it's easy to organize and widely accepted.
obviously there are lots of other calculations one could do, but there are time and budget constraints. life is short!
I think it's embarrassing because one would think that a *business* writer would understand that the value of the publicly traded equity of a company is not very closely related to the "significance" of the "swath of Corporate America" represented by the company. As pointed out below, these are companies that have failed or are close to failing (the entire raison d'etre for the government's ownership). So of *course* the value of their publicly traded equity is low - that's the entire point!
For example, which company's "swath of Corporate America" do you think is more signficant - GM or Cracker Barrel? According to the metric you chose, Cracker Barrel's "swath of Corporate America" is almost twice as signficant as GM's. By assets, OTOH, GM's "swath of Corporate America" is about 400 times as significant as Cracker Barrel. Which do you find more realistic?
I don't know that I'd call it embarrassing but in general I agree with Alex. The reason the gov't bails out a corporation is because that corporation is failing. A failing corporation is not likely to have highly-priced stock. Therefore the metric Conor used will necessarily come out very small. But if the rationale behind bailing out GM was because the company is too big to fail, said "bigness" must be measured some other way than by share price. After all, GM is not really "smaller" just because its shares are trading for essentially nothing.
I think that would be interesting but it would take a really long time to get that data together. (Assets would probably be the best standard? I can't exactly say why but that's my intuition.)
The basic point of the chart above would, I think, still hold.
I don't find particularly useful the excuse "I realize the data is bad but good data is hard to get". IMO, if the data is bad, you should either work to obtain the good data or not do the post.
If you think that's what I'm saying, let me then say very clearly that I think the publicly traded value is a perfectly good metric and I'm not making any excuses or apologies for using it.My data is good.
There are other metrics available, as I say in the original post. The point -- again, one I make in the original post -- is that no matter what metric you use you will end up with the same result as in the original chart. We're taking about a tiny proportion of the corporate landscape, unless you really want to torture the word "significant."
Thanks again for your comment.
Unfortunately, the paragraph including the results still isn't quite right, for two reasons. I hate to seem like a mathematical scold, but I think it's important to make sure these things appear correctly on the record, to avoid confusing anyone who's trying to learn:
1) You write 5.07^-02, which is actually 5.07 to the -2 power, and that's *not* the same as 5.07 times 10 to the -2. (The former is 0.0389; the latter is 0.0507.) It should be written as either 5.07E-02, which is how Excel prints it, or 5.07*10^-2.
2) I'm afraid your commenters may have led you astray a little in calling this an "exponential number." This is not a standard description, for a very sensible reason: an adjective appended to "number" should indicate something about the number itself, but the decision to write a number as 5.07E-02 rather than 0.0507 is simply a choice between two ways to display the same number. It's a choice of notation, and accordingly the style of 5.07E-02 is called either scientific notation or exponential notation. (The former is a little more common.)
I also want to expand a little on the criticisms offered by some of the commenters here. The ideal measure is probably government-owned firms' value added as a percentage of American GDP. I understand your argument that this data is not as easily available (at least to my limited knowledge), but the more important point is that using publicly traded values is completely incorrect. It's not just a matter of measurement or perspective; it's simply wrong, perhaps by multiple orders of magnitude.
Under normal circumstances, if the government owned chunks of publicly traded firms, market capitalization wouldn't be such a bad way to measure the government's ownership of the economy; that's because the stock price accurately reflects the "value" of a company, as measured by the expected, discounted future stream of dividends. This is not at all true, however, when the government is taking over bankrupt or near-bankrupt companies. In this case, the current equity of a company is either nearly or completely worthless; the future dividends of the reconstituted corporation will go to current bondholders, who will receive equity in bankruptcy proceedings. The "publicly traded value" of a company, then, is only a small fraction of its actual value, which is held by the bondholders (like the government!).
Bottom line: it's a serious underestimate.
Thanks for this very thoughtful comment. But, sorry, I'm standing by the post! (I surrender to your math nag though; the post is updated.) a few quick thoughts:
1. the government does not own 100% of the shares of GM or AIG. if it owned 100% of the shares then there would be no present value of the shares (there would, indeed, be no shares); it would be like TVA or the post office.
2. The share price of those companies actually didn't drop much or at all when the goverment stakes were announced. (at least I think this is true -- I just checked the dates on google finance and they certainly weren't the low points.) by your argument, it should have dropped to zero.
3. in some respects my count overstates the gov's ownership, since I counted up all the shares of the companies and not just the shares the government owns.
but #2 is the most important. if you are saying that the value is important except when the government takes over the company, why didn't the share price drop to zero? Or, approached from the other direction, if the share price was as close to zero as it was going to get BEFORE the gov took over the company, what made the company significant before the takeover? maybe the value of the assets, but I think having a set of assets that can be stripped away and resold is really debatable from the "significance" point of view.
more generally, I suspect the point of the post will stand no matter what measure you use. there's a difference between saying "this is an imperfect measure and there are better ones" (a point I agree with) and "a different measure will give you a dramatically different result." Even if I were to measure the assets of all the companies in the American economy, the US government would now control ... what? Maybe .1%?
Conor
Wow. Math may be the strong suit for some of you, but comprehension obviously isn't.
Publicly traded worth is a perfectly reasonable measure given the point of the article, which is this: the nationalization (or part nationalization in most cases) of a few large American companies by the US Government in the past 3 months has not 'significantly' changed the balance of public and private corporate ownership in the US. The vast majority of stock remains in 'private' hands (bearing in mind that enormous amounts are controlled by State and City pension funds), and always has been.
The US Government has not suddenly acquired a 'significant swathe' of private American business.
The GM packaged bankruptcy is shocking on an emotional level, but completely rational on a business one. Given what occurred at the end of last year (how soon we forget), Lehman Part II could not be allowed to happen with so many jobs at stake and any hope of real recovery still nebulous and uncertain.
It's not even 'un-American' or anti-free enterprise. If this move works the US Government will make a tidy profit very quickly. Yes there's risk, but its a risk awfully similar to one a hedge fund or venture capitalist would make.
Excellent piece.
Conner - I agree GM isn't a significant "swath of Corporate America". However, isn't a big part of the justification for the bailout that GM is so large and interconnected to other parties (e.g. suppliers) that their failure would be devastating to the broader economy? President Obama's said in his speech today, "In the midst of a deep recession and financial crisis, the collapse of these companies would have been devastating for countless Americans, and done enormous damage to our economy."
It seems to me like you can't have it both ways. Either GM is big and important and the government takeover is a big deal, or GM is not very significant in the overall economy and this is more about putting the needs of the few (special interests) over the needs of the many (taxpayers offering $60 billion dollars of assistance that I am highly skeptical will ever be paid back in full). Which is it?
Doesn't your chart beg the question that, if the portion of the U.S. economy taken over by the federal government is so vanishingly small, why was it so important for taxpayers to spend trillions of dollars bailing it out?
I can't comment on your math, but that discrepancy strongly suggests that the metric chosen to decide how much of corporate America is "owned" by the feds is probably the wrong one.
Hmmm ... note to self: read other comments first, THEN post.
I'm curious as to how this would compare to countries held up as existing bastions of Socialism. Would it be significantly higher or about the same? Any clue where that data could be found?
I am wondering the same, although I haven't found anything substantial. This topic is fascinating and I would be surprised if some research didn't already exist.