Effect of government bailout: Everybody can hold hand out

Simple question: Where do we draw the line when it comes to bailing out some and not others? As economists, when we look closely at the recent bailouts of investment banks, insurance companies, and commercial banks (as well as the proposals to bail out city governments, state governments, and the “Big Three” automakers), we see no clear differences between their business struggles and the struggles of farmers, Mom and Pop shops, and our own universities.

We believe drawing policy lines in the sand is fraught with difficulty and fundamentally flawed. How can a government choose to favor those on one side of the line and ignore those on the other side when few real differences exist between a struggling insurance company and a struggling retail chain? The act of intervening to bail out just one company creates a slippery slope: Why stop with one company when other firms in other sectors of the economy are dealing with serious financial hardship, too? The corruption of the original bailout plan is not the result of a bad plan. It would have resulted from any plan the government created. Whenever favors are suddenly given to some groups, more people line up in search of the favors (economists call this behavior “rent seeking”). Rent seeking is rampant, and it will continue to be widespread so long as the government continues to make bailout promises.

There is only one obvious way for the government to avoid this problem: Stop bailing firms out now. Rather than get out of the way and allow all unprofitable companies to fail, the government has instead responded by making promises to some and talking tough to others. The rules of the game appear to no longer be impartial and equal for all players; instead, the rules are different for those who are the most powerful, most vocal, and most politically connected.

The unprecedented bailout is a clear case of the squeaky wheel getting the grease. When the government oils the squeakiest wheels, you can bet other squeaks appear. The squeakers have already been lining up, and it has led to Treasury Secretary Hank Paulson’s original bailout plan being thoroughly corrupted by political interests.

In light of our analysis, we hazard the following prediction: Farmers will soon be calling for greater interventions to support their revenues. Given the sharp downturn in the fortunes of farmers, it will not be long before the “bail out the farmers of America” battle cries enter Washington policy discussions. In fact, organizations like Farm Aid and its board of celebrities are already hard at work pushing for the $700 billion bailout to be directed toward farmers.

The Wall Street meltdown has already spread into the hinterlands, according to many farmers, galloping through Main Street and out along the dusty county roads. Because of the credit freeze, farmers are also having difficulty borrowing. Prices for corn and soybeans have fallen by more than 50 percent since June. Borrowing costs have risen, and their balance sheets are quickly moving into the red.

And, for policy-consistency sake, farmers have a politically compelling case: Why should they be treated any differently than other firms benefiting from corporate welfare? Certainly, there are multiplier effects from farmers going bankrupt: less agricultural output means lower incomes for farmers; lower incomes means less consumption; less consumption means lower retail sales; and so on. Jobs are at stake if we let farms fail. And, by letting them fail, the government will be allowing one version of the American dream to vanish. After all, American farmers feed all of us, including the defiant moguls on Wall Street.

Looking closely at the bailout, there is an important lesson to be learned: Well-intentioned, good politics is rarely based on good economics. And that’s why these policies will remain popular.

Scott A. Beaulier, is an economics chairman in the Stetson School of Business and Economics at Mercer University.

David L. Prychitko is an economics professor at Northern Michigan University.