Despite What Pundits Tell You, There's No Such Thing As 'Government Money'
Writing about President Herbert Hoover’s efforts to soften the blow of recession in the early 1930s, the Wall Street Journal’s Greg Ip recently opined that the 31st president “fell short because he wanted private-sector solutions when government money was needed.” While Ip’s economic analysis will be addressed in a bit, for now this notion of “government money” rates singular attention. What could Ip possibly mean?
Indeed, in his attempt to indict the private sector’s failure to stop what he deems crisis, Ip is aiming to distinguish between private and public money. That’s a mistake. There’s quite simply no difference between private and public money other than “government money” is wealth taxed or borrowed away from the private sector. To state what’s rather obvious, governments only have money to spend insofar as the private sector is creating the wealth in the first place.
Applying all this to Ip’s belief that “government money” must be spent in times of economic uncertainty in order to prop up ailing institutions, the Journal reporter wasted words. Or at least a word. There’s no such thing as “government money.” The money used by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke (with President George W. Bush’s blessing) to bail out banks, investment banks and carmakers was not evidence of some newfangled form of currency being put to work in order to save the economy. Far from it. It was merely sad evidence of government extracting precious wealth from the private sector in order to prop up what the market-disciplined private sector had previously rejected.
Markets quite simply are. The investors who populated the markets rejected saving Bear Stearns, Lehman, AIG, etc. In certain instances, federal officials chose to ignore the message of the markets with the money of others. As such, Ip’s supposition about “government money” being used to improve a bad situation amounts to a rather monstrous non sequitur. An economy or sector of the economy is said to be in trouble, so the mystifying answer is to empower government officials acting with highly limited knowledge to allocate precious resources over the objections of a marketplace incorporating all known information? How could the substitution of what’s not market-informed for what is actually improve the near or long-term financial and/or economic outlook?
Seeking greater specificity, if information pregnant markets have decided that Bear, Lehman, Goldman Sachs or GM should not be saved, how on earth would it improve the economy for individuals operating outside the workings of the marketplace to bail them out? The previous question is worth asking mainly because President Bush justified his support of the bailouts with the assertion that “the whole economy is on the line.” Really? How? Enron was much larger than Lehman, as was Worldcom. Should the Bush administration have saved them with “government money”? Notable there is that between Enron’s implosion in December of 2001 and Worldcom’s in the summer of 2002, the Dow Jones Industrial Average fell a little over 3 percent. Failure is a normal – and rather healthy – aspect of capitalism that investors digest quite easily. That’s exactly what they did seventeen years ago. It’s a reminder that the error in 2008 was intervention by federal officials. Logically. If central planning always and everywhere fails an economy during supposedly normal times, it surely doesn’t make sense during abnormal ones.
Some may respond that “banks” or “investment banks” are different. Carrying the latter to its mindless endpoint, it’s seemingly alright if ($150 billion market cap) Netflix fails, but not ok if $80 billion dollar investment banks like Goldman and Morgan Stanley go bankrupt. Apparently it’s also improper if ($50 billion market cap) General Motors goes belly up. Never explained then or now is why? What’s so perilous about GM going under, only for a carmaker with a proven track record like Toyota or Volkswagen acquiring it in order to manage it better? Figure that there are no British-owned carmakers today, but automobile production in the UK is presently at record levels. Would it be any different stateside?
As for banks and investment banks, what makes them unique such that failure is such a non-starter? Can readers imagine how depressed Silicon Valley would be if federal officials had leaned against the message of the markets only to save Friendster, Webvan, and Solyndra? The Valley’s strength is a certain effect of the bad being put out to pasture, yet we’re supposed to believe reason must be suspended for financial institutions?
According to Ip, yes. And that’s the problem with his analysis. Contrary to his pro-interventionist view of the world whereby politicians naively act to shield us from recession, economies gain crucial strength from the very downturns that Ip would like to avoid. Thinking about all this in terms of Hoover, his error (and Roosevelt’s after) was the intervention. Painful as they are, recessions are healthy. In fact they’re a certain signal of a recovering economy as misuses of labor, bad habits developed, bad investments, and lousy companies are cleansed.
Putting it as plainly as possible, for politicians and others in government to fight recessions is for them to fight recovery. More specifically, bailouts prop up the marginal and weak at the expense of the good and great.
To all this, Ip unsurprisingly has no answers. He’s merely got easy-to-discredit assertions, and they’re easy to discredit mainly because Ip’s default position is that politicians acting without market discipline or knowledge should be substituted for markets themselves.
Ip ultimately fears the future given his worry that a lack of “unified fiscal authority” in the U.S. and Europe will make it difficult for politicians to do as Bush and others did in 2008. The Journal scribe misses the point, which may explain why securities markets (the approximation of the views of the bulls, bears, and everyone in between) don’t presently share his pessimism. The intervention in 2008 was the crisis for it subsidizing an economy-crippling blast to the past, while the presumed lack of intervention in 2018 and beyond is what has investors logically more confident about precious capital flowing to its highest use in the future.