Monday, November 10, 2008

Against Bailouts

I was always against the mortgage bailout as a theoretical matter, but about the time it passed I decided I was against it as a practical matter as well. My biggest problem with it was that it passed almost unlimited power to the Treasury to meddle with the markets. This lack of transparency means that nobody wants to sell their damaged assets at market price because if they hold out they might convince the government to pay more for them.

One argument I didn't make, but maybe should have, was that it's a slippery slope from one bailout to another. I certainly foresaw at the time a disastrous bailout of individual mortgage holders who bought houses they couldn't afford on terms that any reasonable person could have seen would get them into trouble. I've outlined the problem with this sort of thing before, but to summarize it comes down to the fact that some people bought things they can't afford and now everybody else has to pay for it. This means that if Alice, Bob, and Charlie all make $60k and have similar lifestyles that if Alice bought a $250k house, Bob bought a $150k, and Charlie decided to hold on and wait for the market to drop, now all of them have to pay $200 a year in takes to fund Alice's house and to make matters worse the market stays high so Charlie doesn't get the deal he was holding out for (because he's now paying Alice to stay in the house he was hoping to get when the price dropped).

But I certainly didn't foresee that this would end up in bailouts for Unions, Auto makers, and state governments. I've only seen a couple mentions of state governments, but that's the real focus of this post because I can't imagine something more anathema to the original layout of our government than the bailout of a failing state. It might seem like I'm engaging in a great deal of hyperbole here, but I'm really not. Most people would probably point to Free Speech or Free Religion as the bedrock of the US Constitution, but the fact of the matter is that though it might be the first of the amendments, it's an amendment, not part of the original document. The thread that primarily holds the Constitutional together is the idea that a Federal government only has certain delegated powers and for the most part the States can operate independently. There are several reasons this is a good idea, but two of the primary ones are that it keeps administration of day to day activities closer to the people actually affected and that it creates an incentive to move toward better ways of organizing your government. If the New York law regarding health care is doing a fantastic job and people are going to New York doctors to get services, pretty soon New Jersey (and the rest of the country) will realize what a great thing they have and adopt it.

By bailing out bankrupt state governments we're doing the exact opposite. If North Dakota decides they don't like pollution so they're going to outlaw cars and build monorails for everything and this causes a huge dip in tax revenues as businesses move away and a huge increase in spending, don't worry. The taxpayers from the other 49 states will come to the rescue and subsidize the monorail so that the one state with the bad idea can keep behaving how they want.

Besides this being appalling on its face, it's also interesting with how it fits with a particular pronouncement from President Elect Obama. He was quoted once on the stump with saying that "We can't drive our SUVs, eat as much as we want, and keep our houses at 72 degrees at all times and then just expect that other countries are going to say OK." To be frank, as long as we're paying to keep the Oceans safe from piracy, funding 22% of the UN (at a rate of $1.42 per citizen), and not taking a dime from other countries, I don't care if they think it's OK. Though I don't know his stand on it, I would guess that since he normally takes the standard progressive line that he thinks bailing out California or New York for spending well beyond their actual income is fine. It's a rather odd position to think that people in Nebraska should be okay with paying for unaccountable government spending on Californians, but we need to worry about what France thinks of us spending money we earned how we want.

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