Bad Bailout? – Jared
December 21, 2008 1 Comment
I am of mixed opinions regarding first the financial bailout and now the automaker bailout of the Big Three. I mentioned Fred Barnes and Newsweek’s articles about how America still has a functioning auto industry and the differences between the two are excellent cases for letting Detroit die.
So why bailout? To kickstart the economy. How does debt make it work? Something called velocity. Velocity is how much distance money has. When you spend a dollar, you do not just spend it, but the company spends it, their employee spends it, and the cycle goes on. So, government keeps people employeed by going into debt, allowing company A to pay employees, who in turn spend that money to another company, who pays employees, cycle goes on.
So the theory behind the bailout is that monetary velocity will get us beyond the recession quicker. Good idea? Honestly, we are about to find out. Ten years from now we will know the impact of this “bailout” and recession package. What is learned now will determine future actions when recessions roll around.
Whether this is a good idea or not remains to be seen, specifically the auto industry bailout. Andrew T. Wilson of WSJ raises an example of Margaret Thatcher not bailing out industry in Great Britain when she “spurned the collective wisdom of 364 economists.” It took awhile and in three years unemployment skyrocketed, but inflation was brought under control and the economy took off with productivity leading the way.
What does this mean for us? Well, inflation is not out of control, so we’re ok there. At this point I do not know, nor do any do I think, what the result of the “bailout” and other policies will be, but if nothing else, this will be an excellent economic laboratory for future generations to learn from.