Tuesday, April 8, 2008

America: a Nation of Bailouts?

As Bear Stearns’ counterparties breath sighs of relief, and homeowners targeted for foreclosure holler for federal assistance, we must consider whether we are becoming a nation of bailouts. Every time we have a problem, people turn to the government, and especially the federal government, to solve their problems. For better or for worse, the government is assuming more and more of society’s risks. Many of the bailouts started off as good ideas. Social Security has done much to alleviate poverty in old age. Medicare and Medicaid have prevented numerous needy patients from having to ask for charity at a time when their need was greatest. Federal financial assistance for college educations has allowed many who would otherwise have been left without college and/or graduate level degrees to become well-paid executives, professionals, engineers, educators, scientists, and the like. As burdensome as college debt may be, it’s better than being qualified only to make lattes and grandes.

Some federal subsidies no longer have much logic. Farm price subsidies and federal flood insurance are examples. But it’s too late in the game to suggest that the government step back from its role as national nanny. Every federal subsidy or bailout anywhere becomes a de facto Constitutional right in two nanoseconds. Congress always chooses the pork barrel polka over political courage. And Congress isn’t alone in doing this dance. The Fed joined in with its unilateral, unlegislated, weekend special bailout of the wealthy people who work for Bear Stearns’ counterparties while providing a federal subsidy to the shareholders of J.P. Morgan Chase.

It’s rather expensive for the federal government to bear such risks. Social Security and Medicare are prime exhibits. And the American taxpayer can only look forward to increased burdens. (See the same exhibits.) But this camel’s back can be broken. We must look for ways to ease the burden on the taxpayers, or the entire house of whatever will turn out to be a house of cards.

Taxation is imposed, ultimately, on the wealth of a nation. The wealth of nations is, in turn, based on a nation’s ability to produce goods. You don’t build sustainable national wealth with expensive coffee, fast food, real estate that’s bought and sold like tulip bulbs, and financial intermediation of esoteric and opaque investments. You build national wealth and strength by producing goods. World War II wasn’t won by overly clever Wall Street financial engineering. It was won by, among other things, the enormous manufacturing capacity of the United States in the 1940s. Look at the nations that today are considered economic powerhouses: China, India and Asian Tigers. They got there through production. How, then, to increase America’s ability to produce?

Promote technology--high tech and bio tech. America is a high cost nation and should manufacture high valued added goods. These would be high tech goods. Northern Europe’s economy relies heavily on this idea. America’s overall technological lead would allow it to use such a strategy potentially to even greater advantage. The following steps would help to promote technology.

Increase educational support for math, science and technical students at the grad school, college and community college levels. The advantage in high tech comes from having the best brains. Give these students more outright grants and scholarships; not more debt or cheaper debt. Make it easier for kids to enter these fields. We won’t enhance our manufacturing abilities with more English Lit majors who become lawyers or MBAs in order to get a job. We need engineers, researchers, and skilled machine tool operators.

Increase immigration opportunities for well-educated foreigners who have math, science and technical education and skills. This is an easy way of getting more of the best brains in the world. America offers greater individual liberty and opportunity than just about any other nation. People want to live here. Make it easy for the people would contribute greatly to our economy.

Increase federal funding to maintain and improve transportation systems. America is a big nation and its manufacturing facilities are scattered about from sea to shining sea. Manufacturing prowess in a big nation requires efficient transportation.

Provide tax incentives to businesses that invest in production of goods—not production of services (we don’t want to use federal dollars to encourage more dogwalking services or coffee shops selling $5 lattes). We need more plants and factories that produce goods.

Review Defense Department activities and files for technologies that can safely be released to the private sector. The Internet originated from a Defense Department project. So did the GPS system. Look where they are today. Sure, foreigners as well as Americans benefit from the Internet and GPS. But America has benefited the most. The Defense Department’s technologies were funded by the taxpayers and ultimately belong to the taxpayers. Anything that need not be kept secret for national security purposes should be made available to the public.

Sure, all this costs money. But it's better to spend some money to expand the economic pie than to squabble over a pie that will probably shrink as we rely on foreigners to fund our consumption with a depreciating dollar while we pretend that the next Fed-induced asset bubble is making us wealthy.

For more on economics and the state of the economy, please check out the American Economics Blog Carnival at http://struckintraffic.blogspot.com/2008/05/american-economics-blog-carnival-may-15.html.

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