The New American Way: Bailouts and Dependency

This is the third installment of a multi-part series on suggested economic policies for the next government to consider. These are meant to be long-term solutions.

Government welfare is addicting. It creates dependency by the recipients and control for the government. Federal welfare takes many forms. We tend to focus on the part that is meant for the poor but that may be the least offensive version. The program is ineffective and immoral but at least we can see the need.

From an economic point of view, many of the other versions are far more dangerous; welfare programs distort market signals. They reward and encourage inefficiencies, wastefulness and even corruption. These programs are not charity, they are vote buying. Charity is when you give YOUR OWN money, not someone else’s.

But, the federal dependency has many more facets. There are countless businesses lined up at the trough to get their taxpayer feeding. Solyndra is but one example and even it is not the most egregious for the simple fact that it received a grant, a one-time thing. These are bad enough and there are plenty of other examples but the real culprit in all of this is the entire dependency system that the federal government encourages and perpetuates.

The government’s perpetual intervention into the economy, mostly in the capital markets contributes to undermining the free operation of the economy. Prices are a communication system. We know what job to take based on the compensation offered; we know where to invest based on the profits and losses of the firms we are considering. When the government intervenes, it distorts prices and then the communication system is full of static and false signals. These interventions take several forms, all of which should be eliminated entirely.

Government Sponsored Enterprises

Exhibit A are the Government Sponsored Enterprises (GSEs) and the foremost among them are Fannie Mae and Freddie Mac. They have been proudly screwing up the housing market for years, since 1938 and 1970 respectfully. They have been serving as outplacement firms for displaced politicians for years and so naturally they are run much like the federal government; at a loss and begging for more taxpayer’s money. Of the Fortune 100 for 2011, six firms report a net loss, Chrysler, Bank of America, Sprint, Rite Aid, Fannie Mae and Freddie Mac. The government sponsors two and “bailed out” two others. All are a money pit of wasted capital.


But, the GSEs are only part of the issue and subsidies are more insidious. The federal government hands out subsidies and money to so many it is hard to track. Dairy, sugar, corn, wheat, barley, oats, cotton, rice, and many more agricultural producers get subsidized as do all the energy producers and countless other firms and industries. Subsidies create an over-supply by propping up inefficient producers and thus wasting resources. Subsidies push prices down to the over-supply thus creating a “need” for more subsidies.

Loan Programs

Then there are the loan programs. Small businesses have loan programs, minority owned small businesses, women owned small businesses, small businesses owned by minority women, loan guarantees for big businesses and student loans to name a few. I am a huge fan of small businesses. I have written and done research on entrepreneurship and there is no bigger supporter of the entrepreneurial process. But, I am an even bigger fan of efficient use of resources and if a business cannot make it without a government loan its resources should be bid away by better firms. If we, as consumers choose not to patronize the business, why should we as taxpayers be forced to support it?

And then there are student loans. The next bubble, the collapse in waiting. I am a college professor, among other things. A large portion of my income is dependent on people wanting and getting a higher education. But the entire industry save Hillsdale College is dependent on federal grants and loans. Want to know why the drop out rates are so high and college degrees are not that valuable, part of the explanation is that the student loan programs allow marginal students to attend. Colleges, hungry for money lower academic standards to get a year’s tuition from a student that would not have gone to college fifty years ago. And might I mention that at the bigger schools a potential faculty member’s prospects are partially dependent on how much federal research grant money he has.

State Aid

I spent five years as a senior budget analyst for the State of Maryland. It is obscene how much money the federal government gives back to the states (with strings attached). The states are dependent on federal programs for highway construction, national guard, law enforcement, all sorts of health programs, education, public broadcasting, environmental regulations, subsidized housing and on it goes. In 2011, Maryland received almost 12 percent of its total budget from the federal government, over $81 million. That may not sound like much but Maryland is a small state and the funds are not just blanket funds. The federal government targets things that they want to control. If a state wants its transportation money, it will abide by the federal guidelines on drinking age and speed limits and so forth. There is a reason the states seemed to have lost their sovereignty and they all sort of look alike in policy, the feds have them all on the same string. Brandeis’ laboratories of democracy have become craven teat suckers.


Dependency is becoming a way of life and it is destructive. In a recent article former Obama official, Steve Rattner argues that capitalism is flawed and bailouts are the new normal. To put it simply; he is wrong. What is flawed is the government’s constant and persistent interventions into the market in ways large and small that distort incentives and lead to misallocation of resources. Rattner argues that the government had to bailout the auto industry because there were no private funds but he never sees that there may have been funds if Freddie Mac was not losing an average of $25 billion a year here of late. Maybe there would have been private funds if the government was not taxing and borrowing so heavily to finance its massive subsidy program. Or maybe, just maybe some of these firms should have closed. Here is a list of the Dow Jones 30 from 1928 and 2007 side by side. Many of the nation’s largest firms in 1928 no longer exist and yet the country is wealthier and better off now. A growing economy is dynamic, not locked into the stagnancy of dependency. If we are to grow there MUST be creative destruction as the newest firms replace the older ones, as new methods replace old ones, and new technologies replace older ones. One hundred years ago this administration would bailed out the buggy makers. Thirty years ago it would have been saving the typewriter industry. I think it is still considering a bank teller bailout. .

This dependency culture leads to distorted incentives that often lead to perverse results. The brilliant but underrated economist, Gordon Tullock observed on his trips to Asia that beggars often mutilated themselves to look more pitiful in the eyes of potential donors. He also noted that Americans do the equivalent in order to look more needful to government aid granters. Towns leave the main roads unrepaired and whenever a state is in trouble it threatens to end vital services and student loan applicants always look poor and destitute. Americans must decide; are we dependents or are we achievers. Right now we say we are achievers but many of our policies lead to dependency and it needs to end if we want to return to real and sustained economic growth.