By Arnold Kling
Consider the following list of candidates for government assistance, via financial bailout or stimulus:
a) banks and other financial institutions
b) the nonfinancial business sector
c) underwater homebuyers
d) other consumers
e) state and local governments
In my view, (b) is getting the shaft, while (a) and (e) are getting way too much.
If we are going to have something other than a socialist or crony capitalist regime five years from now, we need a robust nonfinancial business sector (b). That is why my preferred stimulus is cutting the employer portion of the payroll tax, as originally suggested by Bryan.
Regarding the financial sector (a), I side with folks, including Simon Johnson and Nouriel Roubini, who want to see failed banks fail. I disagree with those, notably Ben Bernanke, who are determined to treat banks as temporarily illiquid and thus seek to “tide them over” by buying toxic assets or injecting capital. I think that Bernanke, far from being the right man in the right place at the right time, turned out to be the opposite. Last year was not 1930, in which bank runs were threatening otherwise sound institutions. It was 2008, in which thinly-capitalized institutions that had sold securities that behave like put options or insurance no longer met regulatory standards for solvency. They should be shut down in an orderly way as soon as possible, not kept afloat.
I think that the amount of aid being given to state and local governments (e) in the stimulus is disproportionately high. For all the whining about having to “fire cops” and so forth, the layoffs in the public sector amount to rounding error in the overall employment picture. Yes, the state and local governments are hurting. But they are not hurting more than the rest of us. They are getting a relatively large share of the stimulus funds because the Democrats care a lot more about public employees and their unions than they care about the private sector.
As you know, my views on households with underwater mortgages (c) is that we should pay their moving expenses, but no more. It’s time to get the housing market back to some natural balance between supply and demand, with legitimate, unsubsidized ownership of the housing stock.
Personal tax cuts and various assistance programs to other consumers (d) are not objectionable. However, I don’t think that they promote recovery as much as assistance to the nonfinancial business sector.
My overall point is that the stimulus and bailout efforts suffer from badly misplaced priorities. The federal government is running up a huge debt in a way that favors narrow interests (bankers and public employee unions) while only minimally serving the goal of economic recovery.