Ever since the bursting of the real estate bubble became evident at the end of 2007, Washington has been on a spending spree to avert events that, in its collective judgment, threatened the stability and solvency of the U.S. financial system and economy as a whole.
Although the U.S. economy has experienced recurrent cycles of boom and bust throughout its history, comparisons were quickly drawn between the macroeconomic events of 20082010 and the Great Depression of 19291946. The parallels seem so obvious that the more recent downturn is now often referred to as the Great Recession.
Those parallels are accurate in the sense that both downturns had common causes and were preceded by periods during which the Federal Reserve generously expanded bank credit. The Feds actions underwrote run-ups in stock prices and real estate values and were followed by a tightening that triggered significant contractions in economic activity and significant increases in unemployment. (If you think todays 9.5% unemployment rate is unacceptable, remember that in 1933 a full one-fourth of the labor force was out of work, and that was at a time when most families had a single breadwinner.)
According to policymakers then and now, the appropriate hydraulic Keynesian remedy is more federal spendingfinanced primarily by borrowingto offset freefalls in personal and business expenditures and raise aggregate demand.
Thinking that a modern New Deal would jumpstart the economy, Presidents George W. Bush and Barack Obama already have spent nearly $4 trillion to bail out homeowners who cant pay their mortgages, bail out privately owned companies in the automobile and financial services sectors, and bail out towns and cities that claimed they might otherwise have to lay off public school teachers and other municipal employees.
The dollar figures are breath-taking enough. The amount spent thus far on bailouts exceeds the inflation-adjusted cost of World War II ($3.6 trillion), the next-most expensive undertaking in American history.
When we hear such staggering numbers, its hard to connect. Billions, trillions: what does it mean to me and my family? In fact, it means a lot. You can find out how much Washingtons economic bailouts and stimulus programs will cost you by going to MyGovCost.orgall you need to enter (anonymously) is your name, age, educational attainment and annual income. The calculator also allows you to see how much your investment in Chrysler, GM, AIG and other bankrupt firms would have grown over your lifetime if you were able to use it to build your own nest egg, rather than sending it to the IRS.
The direct cost to the taxpayers of bailing out corporate America is only the tip of the iceberg. It creates three other more serious long-term problems.
One is what economists call moral hazard. Private companies that have received (or can expect to receive) taxpayer-financed bailouts have an incentive to undertake projects that are more risky and more likely to fail than if the losses would be borne fully by shareholders.
Second, as a result of keeping zombie businesses alive, bailouts misallocate scarce productive resources away from more economically efficient (and profitable) uses elsewhere in the economy, alternatives that actually would promote growth and reduce unemployment.
Third, government bailouts are highly selective, based more on political than economic considerations: Why, for example, was Bear Stearns rescued (to the tune of $29.5 billion, which now seems a paltry sum), while Lehman Brothers was allowed to go belly up?
If private companies find themselves in dire straits, it would be far better to allow the orderly processes of bankruptcy to determine who survives and who fails.
Washington increasingly is making spending decisions on your behalf and using your money to finance them. Taxpayers need to understand that the mega-billion-dollar numbers the politicians bandy about, like its only peanuts, is their money that will come out of their pockets, their childrens pockets, and even their grandchildrensyear after year after year, as far as the eye can see.
MyGovCost.org can help taxpayers figure the burden of a profligate government they carry on their own shoulders. You will be horrified.