No Exit From Bailout Politics

The federal government is taking ownership stakes in big banks and financial companies. Those stakes are likely soon to be joined by partial ownership of the automobile companies—and who knows what else? Entry into this new commitment is easy, but exit will be hard.

It’s amazing how candid we get after the election is over!

Since 2004, Democrats have been telling us that Iraq was the bad war they did not want to fight—but Afghanistan was the good war they did.

It seemed hard to believe at the time. Everything that made Iraq tough—weak civil society, hostile terrain, fanaticism—makes Afghanistan tougher. Psychologically too, the Democrats’ self-presentation as eager Taliban fighters seemed suspect. Only 57 percent of Democrats say they would favor the use of force even to destroy a proven terrorist camp. The Party of Battles they are not.

Now Shrum ruefully acknowledges that this self-presentation was at best “reflexive” and perhaps even “misleading!”

What message is appropriate now for those Americans who trusted Shrum’s party to take national security seriously? Maybe Otter’s words from the movie Animal House: “You f----ed up. You trusted us.”

Yet as ominous as the situation in Afghanistan looks, there is another candidate for the role of “Obama’s Iraq”: the bailout.

The federal government is taking ownership stakes in big banks and financial companies. Those stakes are likely soon to be joined by partial ownership of the automobile companies—and who knows what else?

As with Vietnam, entry into this new commitment is easy, but exit will be hard.

• At first, exit will be postponed until the situation seems more stable.
• Then exit will be postponed until the government can get a better price for its shares.
• Then exit will be postponed because the government’s ownership role promotes supposedly important social objectives, such as greener cars or more minority lending.
• Then exit will be postponed because of the accretion of communities of interest around the government role. (See, Tennessee Valley Authority, continued existence of.)

These ongoing government commitments will exact ever steeper costs. The financial costs will be the least of our concerns. (Although the cost to the taxpayer of financing the borrowed capital invested in these firms will not be small.)

Even bigger will be the distortions and dislocations that the outsize federal role introduces into the general economy. When government invests in industry, industry invests in government. (See Fannie Mae and Freddie Mac, political donations by.)

As government becomes more involved in a firm, the firm acts less and less competitively and more and more like a job-protection organization. (See, British nationalized industries, decline of.) A symbiotic relationship develops in which the very concept of a public interest is lost.

Will the Democratic Congress authorize the new “car czar” to revisit labor contracts? What happens when cost-cutting executives at our huge new merged banks want to shift more back office operations to India?

Leslie Gelb wrote a famous book about the irony of Vietnam, arguing that “the system worked”—meaning that the tragedy was produced by a series of rational calculations by presidents doing just what was needed to postpone failure a little longer. In that sense, the system is working again today. The United States is moving to a new form of social and economic organization, the general outline of which is only just now coming into focus. Today’s emergency decision-making will create tomorrow’s institutions. We may not like them much. They will be costly and dangerous. But withdrawal will demand an intense act of political will—and the courage to defy some of the most powerful constituencies in Washington, including the Democratic Party.

Originally published in The Week.