Believe it or not, it has only been a few weeks since the Administration and Congress created the Office of Financial Stability to manage the Troubled Asset Relief Program, or what normal people just call the “bailout.”

In the intervening 6 or so weeks, Treasury Secretary Paulson and his crack staff have spent not one dime—not one—doing what Congress authorized: the purchase of “toxic assets” from financial institutions. Instead they have spent the staggering sum of $290 billion injecting capital into banks and other financial institutions, triggering a cascade of companies to transform themselves into banks to get their hands on the freely flowing federal dollars.

This turnabout—and economists are divided on its wisdom—is unfortunately just the first in what will prove to be a long series of redefinitions of what it means to bring “financial stability” to our sputtering economy. The current economic crisis which started in the financial industry is quickly metastasizing into a full-blown recession that will undoubtedly trigger a painful restructuring of the American economy.

Unfortunately, the impulse to fight that restructuring is going to impose huge costs on both the American taxpayer and in the long run the American worker. Whatever the merits of massive government intervention to prevent the breakdown in the financial structure that undergirds our capitalist system, what is happening now is nothing less than an attempt to usurp the enormous powers of the US government to pick winners and losers in the American economy.

The program to save the financial sector from implosion has quickly transformed into grand plans to restructure the American economy.

There is no pretense anymore that the government is desperately trying to save capitalism from a once in a century crisis; what is happening right before our eyes is an attempt to hijack the US government to save companies from their own bad judgments.

Already we see the car companies lining up for their share of the “Financial Stability” pie. American Express has turned itself into a bank to get into the action. States and local governments are lining up for their piece of the pie. And Lord knows what other businesses and industries will soon be lining up in Washington DC to get their cut of the bailout cash.

Few policymakers doubt that the government has an interest in helping avert the worst effects of a deep recession. The Federal Reserve has massive powers to inject liquidity into the financial system to juice up the economy when things slow down too much, and Congress has already spent billions of dollars this year on a “stimulus package” to jump-start the economy. There is lots of argument about the optimal monetary and fiscal policies, but most mainstream economists recognize that government plays a big role in shaping the economic landscape.

But bailouts are not just another policy tool in the economic toolkit. Rather than being a form of economic medicine, bailouts are more like life support for failing corporations.

By picking winners and losers, and not just shaping the playing field and the rules of the game, government officials distort economic outcomes in an especially damaging way.

Bailing out the car companies, for instance, will simply put off the day of reckoning when the Big 3 will have to restructure their business arrangements and labor contracts that are at the root of their current distress.

Government money will not make the Big 3 competitive with their nimbler competitors. What it will do is put the auto companies under the thumb of government regulations even more than they already are. And the same will be true for the growing list of industries that could soon be lining up in Washington DC for their piece of the bailout pie.

Recessions are never welcome and it’s inevitable that policymakers put a lot of effort into avoiding their worst effects—severe declines in GDP and upticks in unemployment—but bailouts take away the one truly positive effect that recessions do have: wringing out the inefficiencies and misallocations of capital that build up in the good times.

If the new majority in Washington goes down the path they seem determined to follow—using the power of the federal government to prop up companies that desperately need new management and restructuring—the only return we will get on our investment will be a longer recession and even more corporate welfare in our economic life. Europe went down this path in the 1970s and it almost broke their economies.

What we are witnessing today is the rapid development of a bailout culture. The Democratic Congress and its allies in the incoming Obama Administration appear to be living up to Ronald Reagan’s description of liberal economic policy: “If it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it.”

Unfortunately for Republicans, it was George W. Bush who starting moving the economy down this path.

###

David Strom is a Senior Fellow at the Minnesota Free Market Institute

Does the Obama victory last Tuesday signal a sea change in American politics or simply a normal and expected shift in partisan control after eight years of Republican rule?

Obviously none of us knows yet, but there are ample clues to suggest that there is less than meets the eye in the Obama victory, and that liberal Democrats should tread lightly in pushing the more radical parts of their agenda.

Despite the fact that Democrats not only won the White House by a comfortable margin but also made significant (if not stunning) gains in both Houses of Congress, there is little evidence to suggest that the ideological or policy views of the electorate have changed much in the past few years.

Barack Obama won by a convincing margin—6% of the popular vote—but a quick look at past elections shows how unremarkable a margin that is. Franklin Roosevelt won his first election to the White House by nearly 18%, Lyndon Johnson won his by nearly 23%, and Ronald Reagan’s margin in 1980 was almost 10%. Obama’s victory margin is more in line with William McKinley’s in 1900 or Bill Clinton’s in 1992. These were hardly transformational elections.

A quick look at the exit polls—which by the way skew heavily toward Democrats—shows that voters have not suddenly signed onto the liberal political agenda. Despite significant gains for Democrats at the polls, only 22% of voters describe themselves as liberals, while 34% are self-described conservatives. The balance, 44%, consider themselves political moderates, which covers a pretty wide spectrum of political beliefs.

These numbers are essentially the same as in 2004, which was a pretty good year for Republicans. Which of course begs the question, what happened to change the electoral outcome so much in 2008?

The 2008 election wasn’t a referendum on basic political ideology as much as a repudiation of the failures of the outgoing Administration. The public perception of George W. Bush as a failed President determined the outcome of this election. The issue at the top of the public’s mind was competence, not ideology. If anything was remarkable about the outcome of this election it was the fact that McCain remained competitive despite widespread disapproval of the Republican record over the past eight years.

The outcome of the 2008 election was determined by relatively small shifts in the electorate. A few conservatives defected from the Republican ticket, and enough political moderates decided to give Democrats a chance to prove their competence. And unlike Reagan’s election in 1980, Obama ran a campaign that tended to blur rather than highlight his ideological differences with his opponent. Vague promises of “hope” and “change” were simply layered on top of a promise to improve upon Bush’s perceived record of failure.

Democrat success in the 2008 elections was based largely upon the damage done to the Republican brand, not some overwhelming shift in the sentiments of the electorate. This fact does not preclude the possibility that Democrats could build upon their successes to create a new and lasting ruling coalition, but there is scant evidence that they are anywhere close to doing so yet.
This is a time of danger and opportunity for both political parties. Democrats have been given a chance by dint of their (albeit slim) electoral victories to prove that their agenda can improve average Americans’ lives. If they manage to do so, which would require holding in check the forces pushing for a dramatic leftward swing in economic and foreign policies, they have the opportunity to win over skeptical Americans who voted more against Republicans than for Democrats. The biggest danger they face is in believing their own press and assuming Americans are hungering for a much more liberal government. Americans want better government not bigger government.

Republicans will be tempted to lie in wait and hope that the Democrats choose to follow a path of lurching leftward, creating an opening for effective opposition. While this could turn out to be a successful electoral strategy over the next four years it still fails to address the fundamental problem that conservatives and Republicans face the next few years: building a brand and an agenda that a substantial majority of Americans would embrace on their own merits.

Republicans need to do what they have manifestly failed to do over the past several years: translate the core principles that animate the Party into practical policies that a majority of Americans can recognize as addressing the problems they face day to day. Ronald Reagan won not just because he clearly articulated conservative principles that appealed to average Americans, but by translating those principles into policies that appealed to the wide swath of non-ideological voters who determine election outcomes.

Republicans lost this election because voters didn’t believe that they could understand or identify with their everyday concerns. Rebuilding an electoral majority will require more than smart opposition to failing or extreme Democrat policies; it will require putting forth a coherent conservative agenda that average Americans can easily understand and embrace.