Government has another Toyota problem

Ever since “reformers” began pushing for government ethics laws roughly a hundred years ago, the focus has been on protecting the public from so-called private “special interests.” Recently, however, the government’s unprecedented bailouts and takeovers of private firms have upended not only the economic system; they have also turned our traditional notion of government ethics law on its head. In this brave new world of publicly owned American businesses, we may now need to start thinking about how to protect the private sector against the government’s conflicts of interest.

A case in point is Toyota’s recent recall of millions of its vehicles in response to reports of instances – some fatal – of sticking throttles, brake malfunctions, and loose axles. The National Highway Traffic Safety Administration began its inevitable investigations. Transportation Secretary Ray “Loose Lips” LaHood suggested, and then quickly retracted his suggestion, that owners immediately stop driving their vehicles. Congress called its obligatory hearings and demanded Toyota’s head honchos to kowtow before the televised witness tables.

All this followed the usual course for consumer product safety catastrophes. But for the fact that, this time, the federal government owned a majority share in Government (née General) Motors – one of Toyota’s key competitors. Washington also retained a lesser share of Chrysler, whose dowry the administration paid when it arranged – by fiat – for the company to be married off to Italian automaker Fiat.

Governors Steve Beshear (D-Okla.), Mitch Daniels (R-Ind.), Haley Barbour (R-Miss.), and Bob Riley (R-Ala.), each of whom has significant Toyota interests in his state, warned the three congressional committees conducting investigations to tread lightly. “Despite the federal government’s obvious conflict of interest because of its huge financial stake in some of Toyota’s competitors…,” the governors wrote, “it has spoken out against Toyota, including statements U.S. government officials have later been forced to retract.” (LaHood was CC’ed, of course.)

The governors raise a novel question that heretofore has never been considered in the United States (largely because it has been unnecessary): what ethics laws should apply to government-owned businesses? All of our campaign finance, “pay-to-play,” lobbying, and graft laws were enacted to prevent public officials from becoming beholden to private interests, and to use their vast arsenal of public resources – such as earmarks, tariffs, or regulations – to benefit those interests. None of these laws even comes close to preventing the misuse of public resources to harm private competitors of government-owned enterprises.

For guidance on this unusual issue, I turned to the two most familiar U.S. government-owned enterprises prior to the bailouts: the Postal Service and Amtrak. Like GM, both face some form of private competition. The USPS competes with UPS and FedEx in package deliveries, while Amtrak offers a viable alternative in the Northeast Corridor to airlines. While the regulations governing USPS are silent on the issue, Amtrak has a high-level “Code of Ethics” that offers a few helpful starting points.

Amtrak’s code emphasizes the entity’s “commitment to compete fairly,” and, in order to effectuate this aspiration, it first must comply with antitrust laws. Thus, Amtrak may not collude with competitors in price-fixing schemes or to divvy up the market. While this prohibition may help some firms that otherwise would be left out of the collusion, it mainly helps public consumers. More meaningful, however, is the prohibition against “any unfair or untrue disparagement of an Amtrak competitor.” Perhaps Secretary LaHood’s initial comments would fall under this provision. But then again, what constitutes “unfair” disparagement is open to interpretation.

The Amtrak policy also prohibits “gathering and using competitive information” against its competitors, and employees must not “steal trade secret information.” In the Toyota context, such a policy perhaps would prevent NHTSA or Congress from passing to GM or Chrysler any of Toyota’s business information obtained in investigations.

In addition to the Amtrak policy, a draft paper by the Organization for Economic Cooperation and Development offers the following suggestions: 1) government-owned enterprises that compete with private companies should ensure transparency so that public subsidies of its operations are easily discernible; 2) there should be a firewall between the government’s regulatory authority and its ownership role (in the Toyota example, NHTSA officials would be prevented from interacting with GM officials); and 3) government regulations should treat public and private enterprises equally.

Of course, at the end of the day, the best prophylactic and remedy for any government ethics problem is to limit the scope of government in the first place. But to the extent government ownership is the new world order, ethics laws must be enacted to apply to these public business enterprises. Otherwise, private sector critics will fairly cry foul to Uncle Sam over the array of “ethics laws that apply to me, but not to thee.”

Eric Wang, a political law attorney, has advised clients on all aspects of government ethics laws. He can be reached at ericwang@alumni.princeton.edu.