Since President Bush and Treasury Secretary Henry Paulson started the ball rolling with taxpayer bailouts last summer, bailout mania has swept the nation. After the $700 billion wealth transfer to banks passed in October, the most high-profile industry claiming a right to put its hands into its neighbors’ pockets, to the tune of about $15 billion, is the auto industry — General Motors, Ford, and Chrysler. Clearly this is not the end but the beginning of the corporate breadline.
All of these “rescue missions” are being pushed as necessary either to prevent the economy from falling deeper into recession or to help lift the economy out of the hardships that are currently being endured. But in fact, unless our politicians have figured out a way to create resources out of thin air, these policies can only make the recession worse and delay the economy’s eventual recovery, with more misery along the way. In reality every dollar funneled into an ailing investment company or a dying auto industry has to come from somewhere, or more specifically, someone.
Ultimately all of these bailout programs, and, by the way, all “infrastructure” programs meant to “stimulate” the economy, are nothing more than wealth transfer schemes. Every dollar going into these programs, procured through taxation or debt, has to come out of someone’s pocket.
If the money is raised through higher taxes, businesses and income earners across the country are made poorer. They have less to invest and spend. And when the bailed-out businesses are “saved,” those in the rest of the economy, many of them also facing economic hardship, are made worse off.
If bailout money is raised by issuing more government debt, the results will be the same, but the route is more circuitous. By borrowing money the government will simply be drawing valuable resources out of private capital markets and away from investments that would have been made by private entrepreneurs. Again, investors, workers, and consumers throughout the economy have less, and the automakers, investment bankers, and whoever else is on the gravy train has more. This is corporate welfare, not economic stimulus.
It also makes no difference whether the money is loaned to the bailed-out businesses, as is proposed for the auto industry, or given directly as a grant. The money loaned will still have to be raised either through taxation or debt, and activity in other parts of the economy will still be pre-empted. When and if it is paid back, the payments will go to a future government for whatever purposes it has in mind. Those who bear the burden today will be no better off. Making such bailouts in the form of loans is a charade. In the present, they are simply a wealth transfer from successful working Americans to unsuccessful businesses. In the long run, assuming the loans are paid back, the wealth transfer shifts to future politicians and bureaucrats.
But these bailouts are worse than a simple “I win, you lose” zero-sum game. They reward failed business decisions and penalize successful ones. The bailouts ensure that resources remain locked up in investments that are the result of flawed business decisions, rather than being released into the hands of entrepreneurs with better judgment. Real advancements in productivity are hampered. If the Bush/Paulson regime had been in place at the turn of the 20th century, it is likely that there would have been a massive bailout of buggy whip and carriage manufacturers, preventing capital, labor, and other resources from flowing into the burgeoning auto industry. The continuous reallocation of resources from less efficient to more efficient entrepreneurs and industries is necessary for economic growth. Because of this, these bailout schemes actually make the recession worse.
But there is a reason why these programs appeal to politicians. The winners are obvious, easily defined, and seen by all. Politicians can point to them at election time, claiming credit for saving jobs and preserving livelihoods. On the other hand, those who pay the price are not so easily identified. They are the everyday taxpayers, or the people who lose their jobs, or those who are finding it impossible to get a job because private-sector investors are being squeezed out of the market by taxes or government debt. These costs are real, but those who bear them cannot trace their plight easily to the failed government policies. Furthermore, they do not represent an organized constituency that is likely to be a factor in the next election. The victims of these policies shoulder the burden, while presidents protect their legacy and members of Congress get re-elected.
Cordato is an economist and vice president for research at the John Locke Foundation.