Since 2008, the federal government and the Federal Reserve have spent some $3 trillion to secure the financial system and prevent a second Great Depression. What did all this money buy us? A really expensive life jacket.
The economy did not collapse. Growth, while low, has returned. Unemployment, while high, is lower than it otherwise might have been. Institutions and companies that otherwise would have been destroyed are still around, because the government owns or controls them. We own Fannie Mae and Freddie Mac at a cost, so far, of $145 billion. We own AIG at a cost, so far, of $182 billion. We own GM and Chrysler—and bailed out GMAC and Chrysler Financial—for a cost of around $80 billion.
The economic, social, and political consequences of allowing private actors to suffer the consequences of bad decisions were deemed by the government to be too great. So, because too much debt was at the root of the problem, the government stepped in and transferred the debt from the private sector to the public sector. It helped that many of the private actors who received government support also had political connections. Not all of the bailed out institutions were private companies, of course. In order to prevent the layoffs of public employees that would result if the states balanced their books, the federal government stepped in with aid. And Fannie and Freddie existed in the gray world between public and private.
The life jacket kept the economy above water. But staying afloat in the sea is not the same as reaching the shore. It would be silly to suggest that the current economy is desirable, or that the underlying imbalances have been worked out. Yet the administration is in the unusual position of doing exactly that. When Treasury Secretary Timothy Geithner wrote a New York Times op-ed last week with the headline “Welcome to the Recovery,” it was hard not to laugh. When President Obama visited Detroit on July 30 and pronounced the auto bailout a success, his words and demeanor seemed disconnected from reality. Of course the government will be able to preserve manufacturing jobs in the Midwest if it spends tens of billions of dollars on two companies. But what’s the larger price to be paid, in debt and taxes and misallocated resources?
What the Obama administration doesn’t want to acknowledge is that the life jacket has become a straitjacket. Remove it, and more people will lose jobs and livelihoods and health insurance. Maintain it, and the mounting public debt, combined with the sense that the economy is split between government insiders and everybody else, will provoke a political backlash. It would be easier to remove the jacket if the private sector were leading an economic boom. But that isn’t the case. And so the economy is in twilight. The government props up what blogger Arnold Kling calls “unsustainable patterns of specialization and trade” because it is (understandably) afraid of unemployment.
It isn’t supposed to be this way. In an efficient economy, failed companies would die, state governments would balance their books, and the housing market would be rid of government intervention. In an efficient economy, the pain during a correction would be sharp, but also swift. The truth is we’ll never know, because we don’t have an efficient economy. We have a zombie economy.
The zombie economy is filled with unproductive entities that exist only through government life support. The government uses the zombies not to make money, but to promote an agenda. In the zombie economy, where some firms with connections get help while others do not, politics matters more than prosperity. Government cheerleads for specific interests and pits one group of Americans against another. The short-term benefits of the undead economy are visible and touted as signs of success, while the long-term costs are ignored because they haven’t yet materialized. But one day they will, and future generations will pay the high taxes and high interest rates that the zombies will leave in their wake.
Consider the auto bailout. Desperate to trumpet an economic accomplishment, over the last week or so the president visited GM, Chrysler, and Ford plants. This is the first time in six years that all three domestic auto manufacturers are in the black, which Obama attributes to the government’s ownership stake in GM and Chrysler. (Taking credit for Ford’s success is a stretch, since it didn’t accept government assistance. But that hasn’t stopped Obama from trying.)
It’s true that GM and Chrysler’s government-backed bankruptcy helped change some of the domestic auto companies’ worst practices. It’s also true that, in recent months, business has picked up. But the auto bailout didn’t change the fact that these huge companies have been making a lot of cars that Americans do not want to buy.