Why government bailouts don't work

Governments implemented massive programs they say are designed to save the economy from ruin, prevent job losses and heal the wounds of the so-called financial crisis.  While the claims associated with these effort may sound noble, second thought shows them to be not just empty rhetoric but counter-productive.

In 1988 noted economist Friedrich von Hayek (1899-1992) wrote “The Fatal Conceit: The Errors of Socialism” based on principles identified decades earlier.  The book’s basis is that governments strong enough to protect individuals against the violence of their fellows make possible the evolution of an increasingly complex order of spontaneous and voluntary cooperation" (page 32).  Such a complex order is the hallmark of a free people and a free economy.  Those favouring central planning of the economy see this as chaotic and think things could be better organized – if only they had the power to control people’s decisions!  In truth, a free economy is an almost infinitely complex arrangement of cooperation among billions of people through the mechanisms of price and currency.

 Hayek believed that since history only retains records of the activities of governments many people mistakenly think it is government and not markets that set the destinies of humanity.  "The powerful state is not the culmination of cultural evolution; it as often marked its end."   Powerful governments are not conducive to the spontaneous improvement typical of a free people.  Hayek believed that "sooner or later governments tend to suppress the freedoms they had earlier secured in order to enforce their own presumably greater wisdom and not allow social institutions to develop in a ‘haphazard manner'."

Consider the auto industry.  Governments are gave billions taken from the most productive people and businesses and subsidize the weakest among them.  Consumers had already voted explicitly en masse with their choice of auto purchases: they are not willing to pay a price high enough to the likes of GM and Chrysler to allow them to make a profit and keep the business alive.  The profit signal is the surest and clearest signal consumers can send to suppliers.  The existence of profit signals a demand for more of a product or service, yet central planners are preparing to go against the wishes of buyers by giving their money to the companies they favour least, have the weakest business models and lose the most money.

The same type of thing is being implemented in many parts of the economy.  The weakest and poorest managed of the banks asked for the most money.   Resource companies asked for their piece of the pie.  Housing advocates want a slice of the action.  Some want money to be taken from people who are still employed and given to those who are not.  Insanity.  Maybe we should construct bridges, buildings, roads or something else?  What industry and business cannot claim to act as a stimulant of the economy when in fact they all are – so long as they produce without first taking the product of others.

What about the idea governments can ride to the rescue by spending money?  Well, where are they going to get this money?  There are only three sources and they all come from the pockets of citizens: current taxes, borrowing (and repaying with future taxes) and printing new money (which devalues all existing and future money).  So you see all government can do is use its power to force citizens to change their otherwise freely chosen pattern of economic activity.  All such force must produce less effective and desirable results than people would choose on their own – I trust you to decide how to run your own life infinitely more than I trust the self-proclaimed big-brains of central planning.  We should have learned this by now.