Economics Financial Crisis

The Public Purpose of Bailouts

[digg-reddit-me]As in the financial crisis generally, the executive branch, the media, and the Congress have all focused on the corporations whose brands are at stake rather than the people affected. This is understandable. Stalin’s famous aphorism that a million deaths are merely a statistic, while a single death is a tragedy, can be adapted to economic hardship as well. A million bankruptcies by individuals are a mere statistics, while the bankruptcy of a famous brand such as Chrysler or Citibank is a tragedy, affecting each of our lives – as signs come down, commercials stop airing, and the products and services we receive now have a different branding.

But saving a brand name should never be the business of our government. In a government intervention into the market, a brand name might be saved – but this should never be a policy goal. Yet, this is precisely the manner in which this question is presented to the public: Should the government bail out Citibank? Or Chrysler? Or Starbucks? Framed in this manner, the answer should always be, “No.”

The real issue concerns the proper role of government in a market economy.

In this crisis, the issue of how involved the government should be in the economy has largely been resolved. “Do nothing,” doesn’t seem to be a realistic option in the midst of a crisis. In times of panic, we are all Keynesians. The unwinding after the crisis promises to re-ignite a fight about the proper role of government in the economy.

The real issue at the moment then, is the follow-up question: how to balance market forces and stability in a market economy – and specifically, in the midst of this crisis. Mitt Romney, in a New York Times editorial that proved especially influential, made the case for why our current system can effectively deal with the bankruptcies of the Big Three Automakers. Paul Krugman took what has become the consensus liberal view: if only we weren’t already in a credit crisis, bankruptcy would be a good option.

For the past year, this has been the argument – with the same people sometimes switching sides depending on the particular company. Capitalism inevitably involves creative destruction – but in the midst of a crisis of confidence, any destruction becomes seen as potentially catastrophic, as the collapse of Lehman Brothers demonstrated.

But government intervention should avoid saving corporations. The government should, when it intervenes in the market, strive to change the forces at work rather than to inject money into corporations themselves.

Corporations, whose primary purpose is to amass wealth by any means available for their owners, and who always manage to simultaneously amass wealth for the managers, cannot be trusted with public money. There is no public purpose to such profit-making. The public value of a corporation comes from it’s incidental activities – the means by which it is able to amass it’s profits. By bailing out General Motors, the government would be giving it’s money away for no public purpose. But the government does serve a public purpose by keeping General Motors’ factories churning out cars.

Within that distinction lies the difference between outrageous abuse of taxpayer funds and a valid public purpose. The more difficult question is how to avoid the abuse while serving the purpose.

The Bush administration has failed to do this – which is why there is fresh outrage at every million dollar junket by AIG executives or private jet ride by auto executives.

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11 replies on “The Public Purpose of Bailouts”

Hi Chip. Nice little windbag piece. You certainly do blather without content well – not as well as the President-elect that you so adore, but adequately for a high-school senior.

I have no opinion on the bailout of the American motor industry. You seem to have such an opinion. Your articulate piece expressing the emotional agitation surrounding the subject was Obama-like nice, in that you feel the pain of all sides of the issue, but it left me with two questions.

1. When should a government get involved in supporting companies in a market economy?

2. What the hell is your opinion, you blathering idiot? I KNOW PEOPLE ARE AGITATED! If you can’t contribiute to the analysis, you should just shut up – obviously you are addicted to the patehetic sound of the keys of your keyboard clicking irrespective of the content of what is being typed. May i suggest that you simply turn off the computer before you start typing?


Before you suggest a solution, it is necessary to understand the problem.

My point in this was to describe the problem. And although this analysis seems obvious, it has mostly been overlooked by the media and politicians who have focused instead on trivialities such as jet travel by CEOs.

Your reading comprehension does seem to be lacking somewhat though – this piece is not about “the bailout of the American motor industry” but about bailouts more generally.

As for my opinion, I have one, and will post it tomorrow – although it was already posted in a less polished form.

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