Chapter 37: Bailouts
Updated: 7/15/21
Christian Economics: Teacher's Edition
It is as I told Pharaoh; God has shown to Pharaoh what he is about to do. There will come seven years of great plenty throughout all the land of Egypt, but after them there will arise seven years of famine, and all the plenty will be forgotten in the land of Egypt. The famine will consume the land, and the plenty will be unknown in the land by reason of the famine that will follow, for it will be very severe. And the doubling of Pharaoh's dream means that the thing is fixed by God, and God will shortly bring it about. Now therefore let Pharaoh select a discerning and wise man, and set him over the land of Egypt. Let Pharaoh proceed to appoint overseers over the land and take one-fifth of the produce of the land of Egypt during the seven plentiful years. And let them gather all the food of these good years that are coming and store up grain under the authority of Pharaoh for food in the cities, and let them keep it. That food shall be a reserve for the land against the seven years of famine that are to occur in the land of Egypt, so that the land may not perish through the famine” (Genesis 41:28–36).
A bailout is a government program that transfers wealth from the government to an organization that has suffered a major setback. This text describes a bailout. But it was like no other bailout in history. It was a bailout of the entire nation. It was paid for by the Pharaoh, the head of state, who purchased grain, as I have explained in the introductory paragraph of chapter 11. But there was a price imposed: a permanent 20% income tax.
There was a warning about the need for this bailout. First, there was a prediction of a series of events over a 14-year period. Then there was a plan to implement it. From the point of view of the masses, this was a bailout in advance. Joseph did not recommend that Pharaoh announce this prophecy to government officials. He did not tell them to tell the masses: “You’re on your own.” He possessed unique information. He believed it. He was given a plan by Joseph. This was central planning by the state.
The bailout was not a free lunch. The masses had to pay for food with money. Pharaoh kept the money. In year two, the people’s money was gone.
So Joseph bought all the land of Egypt for Pharaoh, for all the Egyptians sold their fields, because the famine was severe on them. The land became Pharaoh's. As for the people, he made servants of them from one end of Egypt to the other. Only the land of the priests he did not buy, for the priests had a fixed allowance from Pharaoh and lived on the allowance that Pharaoh gave them; therefore they did not sell their land.Then Joseph said to the people, “Behold, I have this day bought you and your land for Pharaoh. Now here is seed for you, and you shall sow the land. And at the harvests you shall give a fifth to Pharaoh, and four fifths shall be your own, as seed for the field and as food for yourselves and your households, and as food for your little ones.” And they said, “You have saved our lives; may it please my lord, we will be servants to Pharaoh.” So Joseph made it a statute concerning the land of Egypt, and it stands to this day, that Pharaoh should have the fifth; the land of the priests alone did not become Pharaoh's (Genesis 47:20–26).
This was the means by which God brought the entire nation, excepting only the priests, under bondage to Pharaoh. Egypt was polytheistic. The nation had a doctrine of the Pharaoh as the connection between heaven and earth, gods and man. God gave them a practical lesson in applied theology: servitude to false divinities. The bailout was a means of common grace: preserving life. It was also a means of common curse: subordination to false gods.
A modern government bailout is different in application, though not in terms of its primary result: the partial enslavement of the nation to a false god, i.e., the state. First, a bailout is not the product of a divine forecast. It is the product of some company or group’s inaccurate predictions. Events catch the group by surprise. It faces an economic disaster that its leaders did not foresee.
Second, it is paid for in one of three ways, as are all government expenditures: taxation, borrowing, or central bank inflation. Usually, it is a combination of all three.
Third, every bailout is a violation of the rule of law: “You shall do no injustice in court. You shall not be partial to the poor or defer to the great, but in righteousness shall you judge your neighbor” (Leviticus 19:15). A modern bailout almost always involves the transfer of wealth collected by taxpayers to the rich: large corporations. Large corporations are run by rich men who have close personal connections with national politicians. They are influential in powerful circles.
Fourth, bailouts establish political and legal precedents. Others follow. Bailouts structure politics. They become acceptable. They become part of the political landscape. They become more difficult to resist.
Fifth, bailouts corrupt politics. Politicians and rich special-interest groups become intertwined. The ability of politicians to raise campaign money from rich people makes them ever-more dependent on these people. The rich are aware of this. When it comes time for the rich to collect on these political investments, politicians do not resist.
Sixth, bailouts encourage what is called moral hazard. Large corporations, especially banks, invest in highly risky projects in search of high returns. Senior managers know that the government is likely to intervene with huge amounts of money. These firms will be regarded as “too big to fail.” So, any profits from risky investments go to senior managers and owners of the corporations. Any losses are transferred to the taxpayers.
Seventh, an important aspect of every bailout is the thwarting of the market’s negative sanctions. The financially distressed companies are being sanctioned by the market. Ultimately, this means consumers. Consumers are saying that they will not pay these firms. Bailouts substitute the positive sanctions of politicians for the negative sanctions of consumers. This wealth transfer comes at the expense of taxpayers.
Eighth, a bailout falls into the classification of the things that are seen and the things that are unseen. This distinction was first written about by the French economist and politician, Frédéric Bastiat, in 1850. The things seen are the bailed-out organizations. The politicians remind voters of all the jobs that were saved. But there are always costs: the things unseen. What about the jobs that were not created because the tax money that provided the bailout was not spent by taxpayers on the things they wanted to buy? No one can see these jobs. They have no political influence.
Ninth, a bailout reminds taxpayers that they are beasts of burden. Their productivity in jobs that consumers approved of is transferred to unproductive organizations whose leaders did not accurately forecast the things that consumers wanted to buy. These leaders will now get more opportunities to demonstrate that they do not know what consumers want and how to sell this to them. Capital will continue to flow from the productive to the unproductive.
Tenth, every bailout substitutes political coercion for free market voluntarism. It announces to the public that the government is in a position to overcome the market’s sanctions of profit and loss for the sake of politically well-connected people. The political profit-and-loss system is different from the market’s profit-and-loss system. It transfers authority from people in their capacity as successful producers and therefore consumers to people in their capacity as successful persuaders of politicians.
A buyer is a consumer. He wants to benefit from the money he earns. He prefers to spend his money on things he chooses rather than have the government take his money and spend it on things politicians choose.
A buyer worries about any economic crisis that may disrupt the flow of income from other buyers. As a seller of his own labor, he is concerned with economic crises. His fear of a cessation of his income as a seller is focused. His sense of loss at the loss of his income because of taxes is diffused. He does not know what percentage of his money has gone to bail out some organization. It is probably tiny. But his fear of losing his job is great. So, as a voter, he does not oppose most bailouts. He does not know about them. He wants to know that the government will be there if he ever needs a bailout. He regards politics as a kind of emergency insurance program. While he may write to his political representatives to oppose a particular bailout, he does not oppose them in general. A politician thinks that few voters in his district will try to get even with him by voting against him in the next election merely because the politician supported a particular bailout. He thinks such voters will be few. He is probably correct.
A buyer does not perceive the negative effects that bailouts have on the economy. He does not understand the effects of moral hazard on investment decisions by large banks. He may sense the existence of the long-run corrupting effects of corporate money, but he does not associate this with bailouts.
Few buyers understand that bailouts undermine the buyer’s authority in the marketplace. He has money. Money is the most marketable commodity. Sellers want his money. Bailouts substitute politicians’ retroactive judgments for buyers’ retroactive judgments. Buyers voted no by refusing to buy. Politicians voted yes by voting for a bailout. The politicians’ votes drown out the consumers’ votes. This transfers economic authority from consumers to politicians, meaning from the free market to the state.
There are two groups of sellers: the consumer pleasers and the politician pleasers. The consumer pleasers competed successfully with the politician pleasers. They provided goods and services that consumers purchased. This validated the forecasts and plans of the consumer pleasers. It provided them with money, which is capital. Consumers implicitly said this: “Keep doing what you have been doing.”
In contrast are the sellers who ask politicians for bailouts. They have been unsuccessful in persuading consumers to hand money to them in voluntary exchanges. They have therefore sustained losses. In order to get taxpayers to provide money to overcome the effects of these losses, they approach politicians. They ask for money. They devise arguments justifying this bailout, such as this one: the jobs it will save or the falling dominoes it will avoid. The politicians hand over money to these people’s companies. This money offsets the decisions of consumers not to buy from the bailed-out firms.
Sellers in general do not get upset by any particular bailout. The bailout probably does not affect a company in the seller’s industry. It does not affect his company’s profits. In contrast, the seller whose company is in need of a bailout is highly focused. He wants that government money. He will do whatever is necessary to get that money. The levels of intensity are nowhere near the same.
A businessman in the same industry as a bailed-out firm may resent the fact that his competitor was bailed out. That means the competitor will remain a competitor. He senses that the bailout was not fair. But in the back of his mind is this thought: “My company may need a bailout sometime. I had better not oppose this one in public.”
There is no likelihood of a government bailout of a pencil company. It would be best if every other industry were as immune to this prospect as the pencil industry is.
The industry is small. Its products are not considered vital. There are substitutes if one company goes bankrupt. Pencils are familiar to everyone, but there is little brand loyalty. If one company went bankrupt, there would not be pressure from employees through their union for a government bailout. There is no union for pencil industry workers. The industry has no political clout. No one pays any attention to it. So, the industry is governed mostly by the law of supply and demand.
Christian economics teaches the principle of private ownership. An owner is responsible for his property. He is responsible for the success or failure of his business. There is no biblical case for a government bailout of any company or industry. The taxpayers are not responsible for the failure of any company. They were not going to be participants in the company’s profits. They should not be participants in the company’s losses.
Bailouts are the result of political decisions. Politicians possess the coercive power of civil government. They can tax and spend. In a non-Christian system of political economy, voters do not automatically vote against politicians who have voted for bailouts of faltering companies. They do not impose the negative sanction of not re-electing candidates who use taxpayer funds to bail out companies that have not satisfied customers. A bailout uses money that was forcefully extracted from taxpayers in order to enrich owners who were unable to persuade a sufficient number of customers to pay money for their products. This is coercive wealth redistribution to further career goals of incumbent politicians at the expense of taxpayers. Because voters do not recognize such coercive wealth redistribution as theft, they do not impose negative sanctions at the next election. The bailouts continue.
In 1887, President Grover Cleveland vetoed a bill that would have provided free seeds to farmers in the state of Texas who were suffering from a drought. Cleveland resolutely vetoed all such bills. He vetoed more bills in his two terms as President than any other two-term President: 584. This is from the text of his veto.
I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that though the people support the Government the Government should not support the people.The friendliness and charity of our countrymen can always be relied upon to relieve their fellow-citizens in misfortune. This has been repeatedly and quite lately demonstrated. Federal aid in such cases encourages the expectation of paternal care on the part of the Government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood.
This outlook has not been shared by most politicians ever since 1900. They have voted for bailouts of large companies. They have not recognized that these bailouts violate the principle of equality before the law (Exodus 12:49) and the principle of not favoring one income group at the expense of any other group (Leviticus 19:15).
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