The Political Economy of Bailout Nation

One consequence of handing out a $700 billion bailout, with the number $700 billion determined by the fact that “We just wanted to choose a really large number” is that it creates a new political and psychological anchor for all kinds of other special pleading. Take, for example, this tale of the looming auto industry bailout:

With Congress preoccupied with the massive, $700 billion bailout plan for the financial industry, General Motors, Ford, and Chrysler have finally secured Part One of their own federal rescue plan. A bill set to be passed by Congress and signed by President Bush as early as this weekend—separate from the controversial Wall Street bailout plan—includes $25 billion in loans for the beleaguered Detroit automakers and several of their suppliers. “It seemed like a lot when we first started pushing this,” says Democratic Sen. Debbie Stabenow of Michigan, one of the bill’s sponsors. “Suddenly, it seems so small.”

And how did they come up with $25 billion? Well:

Earlier this year, the automakers sought a first installment of loans totaling about $6 billion. But the nationwide credit crunch severely crimped their ability to borrow, and besides, next to bailouts like $200 billion for Fannie Mae and Freddie Mac, a mere $6 billion started to seem unduly modest. So Detroit raised the ante to $25 billion, the most allowed under current law.

You can hardly blame the grasping hands from just trying to get as much cash as possible, but you can see here that the auto makers don’t have any real plan beyond getting as much bailout as they can and then hoping for the best. As a policy matter, it would almost certainly make more sense to bail out people — spend money on helping individuals adversely effected by economy trends to start their own businesses, relocate to places where their skills are in demand, gain new skills, or even just make ends meet during a difficult transition phase. Spending money to prop up failing firms prevents their considerable assets from being redeployed in productive ways. But as the article indicates, once you start handing out giant bailouts it becomes increasingly difficult to say “no” to the next politically powerful constituency that wants some bailing out.