Monday, November 17, 2008

Why Bailouts Are Immoral

The Big Three American automakers have their hands out. Way out. $25 billion plus. Several commentators have already pointed out the total impracticality of giving them another dime, much less many billions.

Not least of their points are such facts as that Ford alone is $160 billion in debt. If that much private credit couldn't help them reverse their fortunes, another few billion from taxpayers isn't going to magically fix their underlying problems.

Having the Feds attach strings to the money, such as limiting CEO pay or arm-twisting executives to change their corporate decisions, is a laughable idea. If Barney Frank could run a business he wouldn't be in Congress. He'd be in business getting paid much more to create havoc and do nothing useful.

But among all the the excellent reasons not to give those lining up a single taxpayer penny one stands out: the money Congress is proposing is more than enough to buy all three companies outright at their current market capitalizations. If politicians had the courage of their convictions, let them nationalize the damn companies outright and simply bark orders at their newly enslaved underlings. In other words, let them not be cowardly Fascists but openly honest Marxists.

But there's no need to look at the practical pros and cons of each bailout proposal separately. One need only establish the moral principle that all government bailouts are immoral and it will become clear that it's something that shouldn't be done at all. Shouldn't, that is, if one believes one should not do something immoral. Given that we're talking about Congress here, that can't be assumed. But let's limit the discussion to decent, rational people for now.

As it happens, proving that assertion about bailouts isn't hard and nothing I say on the subject is going to be original. Then, as Constitutional scholar Randy Barnett said (paraphrasing Chesterton, I think), sometimes it's less important to be original than to remind people of what's true that they already know.

A government bailout always requires the money to come from somewhere. That somewhere, ultimately, is a group other than the firm being bailed out: the taxpayers. As private individuals, they chose not to buy that firm's product or service at the price it was offered in sufficient quantity to keep the company profitable.

No one (yet) would argue that company executives going to their customers' doors with guns and grabbing a wad of cash out of their wallets would be ethical. Filtering it through the government's hands changes nothing, morally speaking. Those same individuals, now in their role as taxpayers, don't become any less a victim just because the actions are done under the aegis of law by guys wearing cheaper suits. It just cheapens the law.

Another obvious ethical problem with giving failing firms more money is that it deflects the consequences of their failure.

Most business failures are a combination of bad luck, bad government policy, and — last, but far from least — bad judgment. There's nothing anyone can do about bad luck (except work to overcome its effects). Bad government policies punish everyone (though not always equally). Still, throwing more government money at firms only deflects the failure of those policies, so it falls under the same principle. Bad judgment is incurable, at least by anyone but those who display it and then rarely.

A bailout only lessens the logical results of those bad judgments. If there were any better way to corrupt an executive's thinking processes — his attention (or lack thereof) to market conditions and the whole way he goes about making decisions — than by removing market signals by a bailout, it's hard to think what it might be. That corrupting process does no one any favors, least of all the business executive.

That deflection of consequences can't help but encourage irresponsibility. Even if the business failure occurred through no fault of anyone in charge — a rare circumstance, since inventing the light bulb only puts (some) candlemakers out of business once a century and then slowly — shoring up a failing business doesn't encourage anyone to change their behavior.

Rather, it entrenches the status quo. Morally, that's unhealthy. Human flourishing requires a constant struggle to create the new in order to achieve the values that increase it. The status quo is only fit for animals who live in a neverending repetitious cycle, not an upwardly moving line as do healthy humans.

Worst of all, it's simply a deflection of justice. You fail, you fail. That result is morally more valuable to all concerned than any billions used to keep producing unwanted cars or insurance products, or artificially propping up high home prices. The reason is simple. Any deflection of justice away from one man always shifts it to another who had no part in the affair.

Creating situations of this sort is known in some economic circles as "moral hazard," a silly term, though a sound idea. Responsible parents help their children see early on that shielding them from the consequences of their choices only encourages irrationally risky behavior. The value of that policy doesn't vanish when people mature.

Time for the beggars to grow up.

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