“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
-Henry Hazlitt, Economics in One Lesson
With each new economic stimulus package, direct industry or corporate bailout, and housing market rescue bill, the politicians, the media, and the corporate representatives trot out a long list of people who will be helped by the spending of vast sums of money on one special interest or another. And if the bill does not pass, economic disaster is predicted, not only for the industry that does not receive a special subsidy from the government, but also for the rest of the economy.
Whether or not the economic calamity ever occurs or not is immaterial to the argument used by special interests. They say, in effect, “Despite how poorly we have run our companies, and despite the fact that our investors have decided we are a poor financial risk, you the government must force taxpayers to invest in our company. Otherwise, if we are allowed to fail, a domino effect will take place, harming every other industry connected to us, people will be out of work, and you politicians will be blamed for not saving the economy.”
But corporations lining up for bailouts overlook the fact that, if they were allowed to fail and their poorly utilized resources were allowed to be redirected to more efficient industries, the country would be better off. Of course, the special interests demanding the taxpayers be forced into supporting them would be worse off — but the fact that they are failing so spectacularly indicates that their industry may need to be restructured or eliminated.
The fact that they employ large numbers of people just indicates how the productivity of many people is being wasted. For example, the American financial industry, over the past decade at least, has provided no actual production and has not even made the production of goods and services easier. Wall Street has only created novel investing products, tricked people around the world into trusting in these instruments, and spread a toxic mortgage risk around the planet.
But, when the risks to the entire financial system became widely known and investors would not keep buying the toxic mortgage securities, Wall Street firms came to the government for a bailout of their indispensable industry. So far, over $8 trillion has been spent by the Federal Reserve and Congress to revive this industry, all of it seemingly wasted so far and at least $350 billion of the funds simply stolen. Still, though, the bankers say that their industry must be saved or they and others will be hurt.
Every time the government attempts to save an industry, it does so at the expense of taxpayers, citizens, and other industries. Successful corporations and people prudent enough to save money instead of borrowing too much are forced to prop up failing industry and other people who made poor investing and financial decisions. Every dollar the government takes from people to prop up an industry is a dollar that people can not spend investing or consuming with more productive companies.
It is not attempting to save these failed companies that is so wrong — it is the coercion the government uses to do so. If a group pools money together to make a loan to a failing company in the hopes it will turn itself around and the investment will pay off, that is a business decision. But forcing people to do this through government subsidies to business creates moral hazard, encourages other businesses to take unnecessary risks, and lowers the wealth and production of the country.
The latest proposal is to spend $275 billion to save the housing market — $200 billion invested in the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, and $75 billion used to help homeowners behind in their mortgages have their loans modified with help from the government. But all money used in this new bill will have to be taken away from people who could have spent it on some other item or service.
Inevitably, one group of people will be hurt by the efforts to help a group of homeowners that are currently behind on their mortgage payments. What group will be hurt? Unfortunately, that group includes all of us — homeowners not behind in payments, renters, people living with their parents, and even other homeowners behind in payments but not using the government for assistance. The likely consequence will be more foreclosures in the future.
The mistake that the politicians are making is to look at how much help they may be able to provide one group of people (those facing foreclosure), while ignoring who will be hurt (everyone else) and the likely consequence of such a policy (even more foreclosures in the future). But this is exactly what happens with every industry bailout — the currently successful run the risk of being forced to fail in the future because they are forced to prop up currently failing institutions.
This is one reason why it seems that, no matter how much money Congress or the Federal Reserve throws at the problems in the economy, it just gets worse. After receiving billions of dollars in subsidies a few months ago, the auto companies are back for more. Same with the banks and investment firms. Each bailout hurts everyone else who is successful and diverts the productivity of the nation from success to propping up failure.
The result? More unemployment, less productivity. Another quote from Hazlitt: “It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains… The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.”
For anyone who wonders why the job loss numbers seem to be rising every month, look no further than the constant bailouts of one failing company after another. These corporations are no longer producing much of value to the economy, yet they are required to be supported by tax dollars and inflation. This causes other businesses to put off expansion, as they are required by the government to use some of their money to help out these failures.
As a result, businesses can not expand or hire new employees. Depending on how much the bailouts are hurting one industry or another, some companies may be so indirectly affected that they will also be forced to shut down or lay off workers. It is a tragedy, but one that Congress routinely engages in, to keep productivity down, keep people out of work, and slow the entire economy just to support preferred special interest groups.
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