I’m From the Government, and I’m Here to Make You Some Money

1 October 2008 at 11:30 pm 4 comments

| Peter Klein |

I’ve noted before how most commentators on the financial crisis are ignoring political economy. Virtually everyone, with the exception of the good folks at Mises.orgThe Beacon, and a few other sites, treats Paulson, Bernanke, bank regulators, members of Congress, and other principals as the benevolent dictators of neoclassical welfare economics. (This is true even of people you’d think might know something about public choice.) But it’s impossible to analyze the current situation without reference to special interests — not only those whose actions are responsible for the current mess, but also those taking advantage of the situation to rewrite the rules and increase their authority.

One example: A particularly foolish (and dangerous) meme working its way through Washington and the surrounding punditocracy is the idea that the Paulson or modified Paulson plan isn’t really a $700 billion bailout. It’s an asset purchase, the argument goes, not a transfer payment; the Treasury buys $700 billion of bad securities, holds them, and sells them later, once market conditions improve. Maybe the Treasury can sell these assets for, say, $500 billion, so the net cost to the taxpayer is only $200 billion. Heck, if prices rise enough, taxpayers may even make money on the deal! (That’s what the junior senator from Missouri said today. Plenty of clever-silly people are saying this kind of thing too.)

The scenario is pure fantasy. Think of it this way. Treasury gets the $700 billion by borrowing (say, from the Chinese) or through increased tax revenue. Suppose the value of these assets really does rise to $500 billion, and the Treasury sells them back to investors. What will the US government do then — return the 500 billion to taxpayers? Does anyone seriously think Congress would cut taxes or offer rebates to give that money back? Not on your life. Congress will simply take that $500 billion and spend it on new programs. The Paulson plan represents an increase in government expenditures of $700 billion, period. Joe and Jane taxpayer will never get a penny of that $700 billion back, no matter what happens to asset prices.

Entry filed under: - Klein -, Bailout / Financial Crisis, Public Policy / Political Economy.

Teaching Economics through Cinema Strange Bedfellows

4 Comments Add your own

  • 1. kiwipolemicist  |  2 October 2008 at 2:54 am

    You are right: once the State steals some money from the taxpayers it never gives it back.

    I have been unable to confirm this, but I suspect that any rescue package will be funded by the government simply printing new money, which will simply cause further inflation and prolong the recession as happened when the government tried to fix the 1929 crash. It would be gross stupidity to use fractional reserve banking to fix a problem caused by fractional reserve banking.

    Central banking is a policy straight from the Communist Manifesto, which is hardly a resounding recommendation.


  • 2. Matt C.  |  2 October 2008 at 7:57 am

    Sheldon Richman made this exact point the other day. In a short post he states the following [my emphasis added]:

    One of the lies involved in the Wall Street bailout — and there are many, including the claim that the credit markets are frozen — is that the taxpayers will recoup the losses and even turn a profit. The biggest lie there is not financial but political. Even if there are gains, they will not go to the taxpayers but rather to the government. For some strange reason, this distinction is lost on virtually everyone, especially the news media.

  • 3. emre  |  7 October 2008 at 5:03 pm

    “….Joe and Jane taxpayer will never get a penny of that $700 billion back.”

    “You are right: once the State steals some money from the taxpayers it never gives it back.”

    which state stealing money from taxpayers and how?

    That 500 billion you mention about will go to indirectly Joe and Jane taxpayer by building roads bridges across the country investing health care and other necessary public programs unless its being spent on another illegal war.

  • 4. Peter Klein  |  7 October 2008 at 5:23 pm

    emre, the extent to which taxpayers will benefit indirectly is a separate (and, in my view, highly complex) issue. I was addressing only the claim that taxpayers will benefit *directly*, by getting the cash proceeds from the eventual sale of the assets the Treasury plans to purchase. My claim is that none of these proceeds will be returned in the form of tax cuts or spending reductions, which is the claim being made by bailout advocates.

    As for your more general claim about indirect benefits, I think you are operating at too high a level of aggregation. Some taxpayers will benefit from specific expenditures on stuff they consume, while other taxpayers will foot the bill for those expenditures. These are transfer payments, nothing more, nothing less.

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