Wednesday, June 09, 2010

A Bailout By Any Other Name

Matthew Yglesias and Ezra Klein want us to rethink the use of the word "bailout" in public discourse, reserving the word for situations when the federal government bails out companies suffering from their own mismanagement and poor financial decisions. Here's Ezra:

Like Matt, I've heard pretty much every policy people don't like referred to as a bailout. Money to pay teachers is called a bailout. Monetary stimulus is called a bailout. Paying our IMF dues while the IMF makes a loan to Greece is called a bailout.

For one thing, we need a better definition of a bailout. I'd say it's something like "putting public money into a firm that's insolvent because of poor business decisions." Conversely, putting money into South Carolina's schools to blunt the cuts required by plummeting tax revenue caused by a financial-sector crisis isn't a bailout. You may think it's good or bad policy, but it's not a response to epic mismanagement on South Carolina's part.


He's right, to an extent. Stimulus isn't a bailout but a monstrosity of another variety. And paying IMF dues, is, well, paying IMF dues. But sending money to cash-strapped states to avoid teacher layoffs? In my book I'd call that a bailout. Whether or not South Carolina was mismanaged as badly as say, California, is besides the point. I'm opposed to bailouts because of the costs and the disincentives, not because I'm worried about rewarding people who did wrong. Given how the economy functions as an organic whole, I'm not sure how you judge who's in trouble due to mismanagement and who's just a victim of the lousy economy. And I certainly don't want to leave federal government in the position of bailout judge, giving "non-bailout cash" to states or companies judged to be not at fault, while denying bailouts to those guilty of mismanagement.

You can narrow the definition of bailout based upon the actions of those receiving federal money or you can craft a definition of bailout based simply upon the actions of the federal government. I'd go with the latter because it's simpler and just makes more sense. It should still be considered a bailout whether the administration is acting to help a crooked corporate buddy or save American jobs. And from a liberal perspective of the public good, we need our public school teachers regardless of why the state can't afford to pay them all.

3 Comments:

Anonymous rose said...

Ok, first of all, expansionary monetary policy is not a bailout and most people don't claim it is.

But federal transfers (not loans) to states are bailouts. Everyone understands that its a transfer of wealth from responsible states that don't need cash, to irresponsible states. But point is dispute seems to be fault- Ezra claims states can't be expected to plan for a drop of 5% in GDP, so its not their fault that they need money. That's ridiculous, but besides the point. Bailouts have nothing to do with fault, negligence, fairness etc. It's simply the government forcing taxpayers to subsidize organizations that made poor choices.

These guys accuse conservatives of highjacking the definition of bailout and claim it's "destructive for public discourse". Bullshit. Pols are on a bailout spree, and these guys want to change the defintion of bailout because it's destructive of policy ideas that they favor. These were such annoying columns.

11:15 AM  
Anonymous rose said...

One other thing. I assume most people understand that the problem with "too big to fail" is that it makes lenders not scrutinize the risks of the party they're lending to carefully because they expect to be made whole by the federal government. That's what finreg reform supposedly is trying to address.

Is it wise then, to clearly show muni bond buyers that it's ok to lend to irresponsible states because the feds will be there to bail states out if another recession hits? If bond investors don't care about risk and don't push rates up as state's finances become riskier, then we're relying on state's to discipline themselves internally. Good luck.

11:29 AM  
Blogger lonely libertarian said...

Their accusation is that "bailout" is being substituted for government spending the right doesn't like and their response is a narrow definition of bailout that, what do you know, encompasses government spending that they don't like.

And good point in regards to state bond holders, less we forget that states are also funded by private investment.

11:34 AM  

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