Libertarian Ramblings

The circularity of bailout money

Posted by gravisman on January 29, 2009

I want to take a slight detour from purely libertarian thought to talk about the (il)logic of government bailout dollars from a more objective economic perspective.

Let’s start with the general thought process that leads to thinking of government spending huge amounts of money to attempt to boost the economy despite already nearly drowning itself in debt. “People are suffering, and seem likely to continue to suffer, probably even more so than they are now. Therefore we must take drastic action in the form of dramatic dollar spending totals to help the people.” Reasonable, right? Well, there’s a problem there.

The reason that thought process makes sense on the surface is that it’s easy to think of the government and the people as separate entities. We can easily imagine an analogy like two neighbors where one neighbor experiences one hard time and the other does not, and the good neighbor reaches out to help the other. Okay, fine, but the analogy is inaccurate.

Government does not have a cent of its own money. Every dollar spent by the government comes out of the collective pocket of the people, one way or another. Taxes are one way, but as we’ve seen before, taxes aren’t the only way.¬†When we start to think about this, the circularity of bailout logic quickly emerges. The people are in danger, so the government wants to spend money to help them, but the government gets its money……from the people.

Broken down, bailout theory claims that moving money from point A to point B, and back around to point A somehow makes things better. This is the economic and financial equivalent of a perpetual motion machine. Supposedly, each time around the cycle, value is not only maintained, but somehow increased – we’re making value (money) out of thin air simply by moving it back and forth between two points.

Unfortunately, perpetual motion doesn’t work. The only thing that can happen in this scenario is that some value is bled off as we go around the circle. Some is lost through waste, some is lost as benefits to people outside the country, and certainly other means I’m not thinking of. We’re not going to create wealth simply by moving money around the circle.

There is only one way we can claim to derive benefit from this circle route. That is to claim that the real effect of the maneuver is redistribution of wealth, since we’re taking money from everyone and giving it to whom we see fit. I can attack that easily on two fronts. Firstly, as we can all easily see, money is going to huge banks and corporations, so if there is a redistribution of wealth, the benefactors are clearly not the little people – they are those who already had money to lose when this crisis occurred. Secondly, I think anyone would be hard-pressed to tell me that redistribution of wealth is ethically okay.

“Yeah, we’ve decided that some people deserve to have money taken from them, and others deserve to have it given to them without having earned it. Really, we’re just socialists, but we don’t like to talk about that.”

Okay, so I turned a little libertarian at the end there, but the main point is clear. There is a blatant circularity to bailout theory, and it cannot be a net positive on the people in the long run.

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