The Central Defect of Bailouts and Stimulus Plans

The central defect of government bailouts and stimulus packages is that the money is allocated through a political process. It goes to recipients who have the most political influence. Private entrepreneurs and even big business, by contrast, employ investment to earn a profit. The record shows that the latter yields greater economic efficiency, and hence creates real jobs.

The new stimulus package pays lip service to aiding the private sector with various tax incentives for hiring and investing capital. It acknowledges, just barely, that the private sector will be the engine for recovery if recovery is to be had. But the record for such measures is about as dismal as the one for short-term supplements to consumer income. They do very little to change the decisions or behavior of the recipient. If the recipient is wary and uncertain about the future, he or she will probably remain so.

Socialist economies, where governments decide how to allocate resources, are notoriously less efficient than market-capitalist economies. As in Washington, every politician demands his share. The late Abram Bergson of Harvard concluded that the old Soviet Union -- the ultimate in socialism -- employed capital only about half as efficiently as the U.S. That is one reason the Soviets collapsed from economic exhaustion.

Democrats are putting a lot of faith, to the tune of over $1.5 trillion, in economic policies with dodgy track records. At this time of a new president and great expectations, one hopes the political class will succeed better with massive spending than it has in the past. But don't bet the farm.

~George Melloan in yesterday's WSJ