Bailouts

For those who want to keep abreast of the latest public policy jargon, there is a new term you'll need to know. It's called "moral hazard," and it evidently refers to the idea that large corporate enterprises that become insolvent must be allowed to fail in order to prove to investors that poor management carries real economic consequences. It runs counter to the de facto policy that certain enterprises are "too big to fail" and therefore must be bailed out.

I doubt there are many serious economists who would disagree with the necessity of moral hazard. Why, then, do we continue to witness so many government bailouts?

I think a big reason is the dumbed-down notion that the federal government, and more specifically, the president, somehow controls the fate of the economy. In good times, presidents brag that they "create jobs" and they "grow the economy" (oh, how that use of "grow" rankles!). When the economy falters, the media and the party out of power try to pin it on the administration. It only stands to reason that, as voters are increasingly conditioned to view the government as the reason behind every upturn or downtick in the economy, politicians are going to feel more and more pressure to intervene when particular industries run into trouble.

Clearly, there are many ways in which government policies do affect the health of particular industries as well as the overall performance of the economy. However, it does the public no good when the media and politicians exaggerate the government's role. Promoting such misconceptions are not only bad for our politics, but for our economy as well, as it can only lead to a larger government role in the conduct of private enterprise.