22 September 2008

Government should help people, not sectors

I see the US bailout of its financial sector as another, and probably the most disastrous, in the long line of perverse subsidies that have done so much to waste scarce resources, divert taxpayer and consumer funds from the poor to the rich, and devastate the social and physical environment. From agriculture to fisheries, road transport to energy, these perverse subsidies invariably favour the large and global at the expense of the small and local, and corporations and abstract economic variables at the expense of ordinary people.

How does it come about that government ends up subsidising the forces that have done so much to make live miserable for natural persons? The motivations start out as well intended, and even apparently necessary. After the second world war, food availability was critical and governments (mistakenly) identified it with local food production. So government got into the business of intervention; imposing trade barriers, providing open-ended guarantees to farmers, and all the rest. That logic led us to structural surpluses to be dumped onto the third world, undermining developing countries' own food production. It also bid up the price of farmland at home, intensifying agriculture at great cost to the environment and animal welfare, and making it difficult for ordinary people to enter farming, unless they were lucky enough to inherit farmland. Worse, the bidding up of asset values made it very difficult for government to contemplate withdrawing its support. Like a drug habit, subsidies were easy to start, difficult to end. And of course, the subsidies created a whole new set of lobbyists whose entire raison d'etre is to oppose their withdrawal.

It's a similar story with the other sectors. Government intervenes for short-term but well-intentioned reasons. The sector becomes dependent on government for its survival, and ends up, in effect, a nationalised industry. When the sector is small, the financial burden is perhaps bearable, though it still represents a diversion of scarce resources from things that could be valuable - education, health care etc - into things that are worse than useless: overcapitalized farming and fishing, grotesque overinvestment in road transport and dependence on fossil fuels, for instance.

But the latest perverse subsidy - to the financial sector - is bigger than all of these. How it will play out is difficult to foresee. But it seems that institutions that were 'too big to fail' are to be replaced by even bigger institutions. And if the history of previous perverse subsidies is anything to go by, the US financial sector will become another ward of state for a long long time.

The root cause of this tragic misallocation of resources is the lack of clarity at the highest levels about what government is actually for. It's not there to prop up ailing sectors. It's not there to save particular corporations. And it's not there to bolster asset values or abstract economic variables like the rate of growth or GDP per capita. Government's purpose is to supply public goods and services, and beyond that to provide a basic minimum level of health, education and welfare for all. Once it starts trying to work out how to achieve these things it goes awry. Government is a centralized, top-down decisionmaking body. It does not and cannot do adaptation or diversity - and it is precisely adaptation and diversity that a vibrant, prosperous market economy needs. By its latest massive intervention and bailout it will throttle the US economy, institutionalise the corrupt incentives that led to the crisis in the first place, and deny disadvantaged Americans the help they need.

What the US Government should do is something it should have done a long time ago: realign its policy to serve its ordinary citizens. All its policies and all its interventions should be subordinated to the provision of public goods and services, the maintenance of a decent social and physical environment, and a safety net for all. Sadly, its bailout of the finance sector looks like taking it further away from those guiding principles.

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