RALEIGH – Here in Bailout Nation, where trillion-dollar deficits are no longer unthinkable and the Constitution’s restraints on federal power are no longer thought of, the public is restless. Many citizens worry that major public and private institutions are overextended and ineffective. Many worry that their own household budgets, stressed by recession, are about to take additional hits from explicit tax increases as well as the implicit but often less destructive tax of rampant inflation.
They are right to be worried. Some have already expressed their concerns, by participating in Tea Party rallies and other public demonstrations and movements against government bailouts, takeovers, and tax hikes. (The next opportunity is just two days away, the Take Back Our State Tea Party to be held Wednesday at the state legislature in Raleigh.) Others may take out their frustrations in local elections later this year, or in 2010.
There is no shortage of reasons for worry, no shortage of arguments against the creation of Bailout Nation. Today I’ll highlight a point that often doesn’t get the attention it deserves: government bailouts hurt the economy by undermining business confidence and fostering investor uncertainty.
These are no small matters. In a modern economy, individual managers, entrepreneurs, and investors make decisions every day that reflect their best assessment of the economic future – the direction of interest rates, the trends in consumer demand, the fate of promising new technologies and business forms, and the decisions of public officials on issues such as trade barriers, intellectual property, environment regulation, and the corporate tax structure.
With so many moving parts, confident prediction has always been rare and certainty nonexistent. Still, there are degrees. As private firms and households create and modify their plans for the future, dedicating their time and resources accordingly, the clouds obstructing their vision can be thin and tantalizing or thick and menacing. Lacking sufficient perception, they make a rational decision not to hire new employees, not to introduce new product lines, not to invest in new machinery, worker retraining, or start-up enterprises.
They keep their resources parked in safe, low-yielding instruments. Their growing uncertainty and pessimism about their economic prospects create a negative feedback loop. The recession lengthens and deepens.
As former bank regulators Vern McKinley and Gary Gegenheimer explain in a new Cato Institute paper, the bailout policies over the past year haven’t just been costly to taxpayers and to America’s longstanding constitutional principles and traditions. They have helped broaden and deepen the financial meltdown by presenting economic decisionmakers with a puzzling array of arbitrary, capricious, and counterproductive interventions into the banking, insurance, and automobile markets.
Why did the Feds bail out Bear Sterns in March 2008 and Fannie Mae and Freddie Mac in September but not Lehman Brothers? Why did the Feds engage in start-and-stop interventions in other firms, such as North Carolina’s own Wachovia, and essentially compel Bank of America to violate disclosure laws during its acquisition of Merrill Lynch?
Officials from the Bush and Obama administrations have offered rationalizations of these confusing policies, admittedly, but no real explanations. As McKinley and Gegenheimer describe, there has been “no bright-line rule” for bailouts, no basis for private firms, investors, and consumers to know why government has acted in the past and when it might act in the future.
The only pattern appears to be that the bigger a company is, the more likely it is to be bailed out – but even then there are exceptions, and a fundamental mismatch between the stated goal and the likely result. “The policy response of bailouts and maintenance of the status quo has been precisely the wrong response,” they write, “as it has led to retaining many of the mega-financial institutions that pose systemic risk, thus planting the seeds for future crises.”
Having the government subsidize, invest in, or attempt to manage private firms is not just a wasteful and unconstitutional policy. It is a role for which politicians are ill-suited and in which government destroys more economic growth than it fosters.
Bailout Nation is a cloudy, gloomy place. No wonder its residents are restless.
Hood is president of the John Locke Foundation