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Bailout Mania!

Everybody is looking for a handout. 

Except, instead of poor workers looking for bread as it was during the Great Depression, we have billion-dollar beggars from Wall Street looking for a way out of bad investments. 

And to whom are they looking? You, the taxpayer, of course.

The bailout of Fannie Mae and Freddie Mac opened the "Pandora's Box" of government handouts.  Now, every industry is turning to their lobbyists to grease the wheels of Washington for some spare change here and there.  Unfortunately, spare change to them is billions and billions of dollars from taxpayers.

Where does it end? Nobody knows. 

In the meantime, this is how the Libertarian Party is standing up for taxpayers.

 

Crisis Mode

It doesn't take much to go from "bad" to "really bad" when government gets involved.  This is especially true when those in power have the philosophy that, "If it's broken, government can fix it."

Unfortunately, far too often government tries to force itself into problem situations with good intentions that have disastrous consequences.  Because many times these consequences aren't immediate, government officials and the voters who elect them to office don't learn from these mistakes.

The problem with government "fixes" is that while perhaps well intentioned, they do more harm than good and tend to stick around much longer than planned—much like a crazy uncle who overstays his holiday visit.

Just look at the New Deal.  Social Security and Fannie Mae are just two examples of New Deal policies that still linger on at a great cost to taxpayers and the economy. 

This is why it is so important not to rush into "emergency solutions" to these very complicated economic problems when they arise, as we have done in these past few months.  Once created, government programs are very hard to kill. 

 

Financial Bailout

At first, it was but three pages. Then, it grew to 42. When it was on by Congress, the bill was the size of a novel: a 451-page novel they most likely did not read before sending it on to become a law. 

Packed with "sweeteners"–the deceptive name for political bribes—the bill passed with ease.  Sweeteners like more regulations on insurance companies, setting up a "Wool Trust Fund"…and even relief for the manufacturers of wooden arrows.

"It's garbage," Rep. Devin Nunes [R-Calif.] told UPI before the vote. "They're trying to put more decorations on the Christmas tree, but the problem is the Christmas tree."

Only 25 Senators voted against their parties' successful attempt to railroad this bill through the Senate.

Absent from this coalition: Senators John McCain and Barack Obama, the figureheads for Republicans and Democrats, who both voted FOR the bailout.

A bailout, paid for by taxpayer, which sends a lifeline to corrupt CEOs who made bad deals and then looked for rescue.  A bailout that a Treasury Department spokesperson said was "not based on any particular data point" because they "just wanted to choose a really large number." A bailout that nobody knows its probability for success, its end cost and how much taxpayers will ultimately be responsible for. A bailout that is being squandered by the Treasury under a shroud of secrecy; trillions of taxpayer dollars gone without a trace. 

Did they ever stop to think that it was Congressional action that caused the problem in the first place?  Did they ever stop to think if bailing-out these corporations with taxpayer money, in a bill laden with pork, is what America needs right now?

Is this taxation without true representation? Where have all our representatives gone?

 

The "Big Three"

Politicians looking to appease their nervous constituency, interest groups (both from the United Auto Workers and those representing Big Automotive) looking for a handout and know-nothing political pundits looking for a juicy story will all tell you this is necessary for the economic well being of the nation.

In this time of economic turmoil, it's easy to suggest government has the answers, especially when it is backed by sweet-sounding rhetoric and promises of better times.  For those that don't know the historical failures of government intervention in the market, it just might sound good enough to swallow.

However, like most government programs, the reality is far, far different from the rhetoric.

Bailouts are ALWAYS bad for the taxpayer, for the economy, and for business.  Why? Because rewarding the mismanagement of American corporations with a taxpayer-subsidized lifeline does NOTHING to encourage reform or fix the problems that pushed the companies to the brink of failure.  As we said in a recent statement, these bailouts do nothing but prolong the inevitable collapse of companies suffering from extreme mismanagement and poor investments.

This is especially true in the case of automotive companies.

Detroit auto manufacturers have failed to keep up with trends in the automotive industry, locked themselves into destructive union contracts and demonstrated a complete lack of initiative in automotive innovations that make their products enticing to consumers.

Why are taxpayers being used to reward this mismanagement?

 

What do the Experts Say?

It should go without saying that the Libertarian Party is philosophically and pragmatically opposed to any sort of bailout to corporations, especially when they've been run as poorly as American auto manufactures.  But what are the economists saying about the auto bailouts?

The auto industry is the most analyzed industry in history. Economists and analysts inside the automakers, on Wall Street, in consulting firms and universities all follow the business. With all of those smart people, it seemed rational to expect a rational approach to the auto market. That hope, however, has been dashed by events over the last several years.

That’s why I am convinced that a bailout without conditions would be tragic for the Detroit “Big 3” and for America. Leaving the same smart people in charge would lead to more of the same dumb decisions years into the future.

  • Daniel J. Mitchel, senior fellow at The Cato Institute, on Cato's Blog:

A taxpayer bailout would be a terrible mistake. It would subsidize the shoddy management practices of the corporate bureaucrats at General Motors, Ford and Chrysler, and it would reward the intransigent union bosses who have made the UAW synonymous with inflexible and anti-competitive work rules.

Perhaps most important, though, is that a bailout would be bad for the long-term health of the American auto industry. It would discriminate against the 113,000 Americans who have highly-coveted jobs building cars for Nissan, BMW and other auto companies that happen to be headquartered in other nations.

These companies demonstrate that it is possible to build cars in America and make money. Putting them at a competitive disadvantage with handouts for the U.S.-headquartered companies would be highly unjust.  ...

A bailout of U.S.-headquartered auto companies also would be a mistake, as would bailouts of homeowners or any other constituency. If politicians genuinely want to help the economy, they should focus on reducing the burden of government, not increasing it.

 

Will Obama Save Us?

In doing some background research on Obama's plans for the biggest public works project since the 1950s, we talked to Harvard economist Dr. Jeffrey Miron about what this means for the economy. Here's what he said:

LP: Does it make much sense, in terms of stimulating the economy, for the government to invest in public works programs that, when built, produces nothing further?

Miron: Overall, no.  The argument is that the beneficial effects of stimulus on overall activity are worthwhile, even if from a microeconomic consideration the projects do not make good cost/benefit sense.  Thus, in the extreme form, the standard Keynesian position would say it makes sense to have the government hire people to dig ditches and fill them back up.

The theory that underlies this view is not stupid, but not compelling either. 

At a minimum, any stimulus should be on things we would want even if they were not needed for a stimulus.  I am personally not persuaded there are many things in that category given the levels of current spending.

LP: Is there a high chance of damage to the economy by implementing a public works program such as that proposed by Obama?

M: There is certainly the possibility of adverse effects.  New programs tend to last and have bad effects on incentives and efficiency. 

LP: What do you predict to happen should Obama's proposal be implemented?

M: I think the economy will recover in 6-12 months, with or without the stimulus.

LP: Is the best prescription for economic recovery keeping the government out of the economy?

M: In my view, yes. 

Miron brings up a great point about the lasting effects of new government programs.  In fact, it was a program of the New Deal that was at the center of the latest economic troubles: Fannie Mae.

Additionally, the idea that government can, quite literally, dig itself out of this current economic trough is patently absurd.  In doing so, the government often makes things much worse for the economy.  You might say that the government pays to dig its own grave--or, at least one for the taxpayers. 

There are several major problems with Obama's public works plan, aside from the fact that government is making a mistake by even trying to take a hands-on role in the market. 

  • Cost/Benefit Ratio - It is not a guarantee that construction projects will continue to bring any economic benefit upon completion, and "building for the sake of building"--as is Obama's objective--is an invitation for wholesale government waste.  This is like what Miron referred to as "government hir[ing] people to dig ditches and fill them back up." Public works projects that benefit the economy more than the cost of production may be pursued for this reason (at least by those that agree with government intervention, as clearly the Libertarian Party does not); however, no public works program should be undertaken for the sake of simply creating jobs.  Some economists, like Economic historian Price Fishback, predict that "such public-works spending would crowd out a significant amount of private construction," on top of being a waste of taxpayer money.
  • Limited Scope - Public works programs benefit one specific industry, and even a smaller amount of those in that industry.  Not every construction firm is able to handle the rennovations of a bridge, or the construction of a new school.  Most of those that would benefit from a large-scale public works program would be large and specialized firms.  As such, a construction-based stimulus would have no demonstrative benefit outside of the construction industry.  These types of plans "suffer from a common problem–they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly," say economists Susan Woodward and Robert Hall. "Thus a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels and has relatively little effect elsewhere."
  • Too Slow For Impact - One main element of any economic stimulus plan is rapid and immediate relief. Relief plans that take too long to implement often kick-in after they are needed. This is a major complaint with most stimulus packages that are proposed, and large-scale public works programs are one the best examples of this delay. Many of these projects will take too long to get from legislation, to planning, to approval, and finally to the actual construction phase in order to have their intended impact.  What we will eventually have is massive construction spending during a time where an economic stimulus is not needed.
  • Magic Money - One of the oft cited objections with Bush's economic policies was his penchant for massive government spending without any plans to offset this spending with cuts in other areas.  As a result, trillions have been added to an already exploding national debt.  A huge problem with Obama's public works program is that it will add at least $700 billion (and most likely more, in the end) to our national debt, and Obama has stated no plans on how he hopes to address the deficit.  Most Keynesians will overlook this fiscal imbalance, but when the spending appears to have no real economic benefit (should it fail the preestablished cost/benefit test), then Keynesians must even wonder if there is a point to the spending.

 

What is the Solution?

Let them fail.

We said this months ago, before people started jumping on our bandwagon. Now, we lead the fight against more government intervention in the market.

Democrats have never had any problem to getting involved in economic affairs, and Republicans appear to be heading full-steam in that direction.

During his 2008 presidential campaign, Sen. John McCain never once expressed a genuine opposition to keeping the government out of the economy.  He only opposed it when it was obvious that it wasn't going to work.  When it looked like government had a chance to fix the financial industry, he called off his campaign to run to Washington to help ensure government acted hastily.

Sarah Palin still hasn't figured out if the bailouts are a good idea.

The problem we face when we try to look at each individual situation from a pragmatic point-of-view is that it is easy to become persuaded by the propaganda or swept up in the hysteria surrounding these crises.  After all, if there is one thing government is good at, it's making a mountain out of a molehill.  However, a philosophical opposition will at least throw the brakes on any government plan to get involved in the economy.

If we really have any desire for economic prosperity in the future, it is crucial that we not only become pragmatically opposed to government intervention in the market, but also philosophically opposed to such practices.

A free and competitive market allocates resources in the most efficient manner, and each person has the right to offer goods and services to others on the free market.  However, the right to offer goods on the market is not a guarantee of protection against loss and failure. The only proper role of government in the economic realm is to protect property rights, adjudicate disputes, and provide a legal framework in which voluntary trade is protected.

Essentially, we oppose all efforts by government to redistribute wealth, or to control or manage trade, are improper in a free society.

 

Our Critics

On Dec. 10, the Libertarian Party put out a press release calling the logic behind the auto bailout, "insane." In it, we stated that "it's insane that we keep going back to the taxpayers to bail-out struggling corporations who, for lack of good management and sound business practices, have become unprofitable."

We also said that "the Libertarian Party favors letting these companies file Chapter 11, instead of risking taxpayer dollars for promises of reform."

The Kansas City Star, a McClatchy publication in Kansas City, Missouri, was rather offended with our assessment of the situation:

In case you missed it, the nation’s largest third party also opposed appropriating $14 billion of taxpayer money to bail out the American automotive industry.

“It’s insanity,” said Libertarian Party spokesman Andrew Davis. Instead, the Libertarians favored letting the auto companies file for Chapter 11 bankruptcy, taking down the U.S. economy with them.

Now, that’s sane.

The Libertarian Party — founded in 1971 as an alternative to the two main political parties — proudly stands for smaller government, lower taxes and more freedom.

The Buzz says the party also stands to lose just about every election its candidates run in.

Given that the KCS is one of the newspapers that has suffered quite a drop in circulation, its snide tone with us seems a little out of place. 

However, this was our response:

It's nice to see the editors of the Kansas City Star are putting the interests of grossly mismanaged corporations over that of taxpayers. In a recent edition of "The Buzz," the KCS took offense to our insinuation that the recent auto bailout was based on "insane" logic. Instead, the newspaper chose to side with the White House and Treasury Secretary Henry Paulson--who still won't reveal where $2 trillion of taxpayer money went in the last bailout. The Libertarian Party is not oblivious to the economic impact of a Big Three bankruptcy; we simply recognize bailouts don't work and have disastrous long-term consequences.

The bailout of the American automotive industry will do nothing to fix the problems that got them into their current situation: grossly incompetent CEOs, destructive union contracts and an unwillingness to keep up with automotive trends.  If the bailout occurs, as is the hope of the KCS, we will see no change in Detroit. Rather, the Big Three will be back in Washington in a few months asking for more time and more taxpayer money.

This is what the KCS calls the "sane" option? The Libertarian Party, and a majority of American taxpayers, respectfully disagree.

We know what we're talking about when we say that government solutions make more problems than they solve. 

This is why we're against "government problem-solving."  It's an oxymoron.

 

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