24 September 2008

Funding the Bailout

Tax blogger and law prof James Edward Maule rants about where the Treasury would find money for the proposed $700 billion financial industry bailout. Mr. Maule is prone to hyperbole when he gets angry, this time proclaiming that "the managers of these institutions have put the financial health, the national security, and perhaps even the continued existence of the nation at risk."

The United States isn't going anywhere soon, and Wall Street isn't going to kill it. But the problem is serious, and the financial sector has to bear a lot of the blame for the predicament it has created. His deeper point, about where the money will come from, moreover, is serious and on target.

In short, the money doesn't come from nowhere. While some of the amount lend may be recovered in whole or in part someday, through the sale of the purchased assets, that is a gamble. If the U.S. is buying assets that no one else on the market will buy, the likelihood is that some taxpayer money will be lost. We could lose everything, we could lose 10%, we could even gain, but like someone who walks into a casino without having research in advance on the probabilities in particular games, all we really know is that the odds are against us. Whether we have lottery odds, or favorite horse odds, or long shot odds, we don't know, because we got to this place as a result of the bookie who sets the odds (credit reporting agencies and key market players) screwing up in the first place.

No one has suggested any taxes to pay for this expenditure. But, simply "printing more money" (it more complicated than that but the equivalent can be done) produces inflation which has consequences. Monetary inflation is an implied tax on everyone whose income does not rise in lockstep with the cost of goods and services. Inflation can also destabilize the economy, although it does have the virtue of reducing the bite of debts denominated in dollar terms, such as fixed rate debts like fixed or rate locked mortgages, for people who have incomes that grow with the cost of living.

Monetary inflation isn't usually as bad as "real inflation" produced by the need to pay more in real terms for imports (like foreign oil) which transfers money out of the domestic economy entirely. Monetary inflation merely transfers wealth from one part of the domestic economy to another in an economically disruptive way. But, there aren't many economists out there who believe that monetary inflation is a good way to finance major government spending. Used in excess, major government spending financed by printing money leads to hyperinflation which is a death knell to a functional economy and often leads to martial law.

Borrowing money from third parties (and much of U.S. Treasury debt is held by foreign sovereigns) both increases the share of tax revenues for which the public gets nothing in return, and imposes a burden that must be paid off by taxes from some future generation.

Even more simply, there is no such thing as a free lunch. Somehow or other, spending money has consequences to the general public that spends it. We may not know exactly who will bear the burden, but some large class of people will bear that burden. All spending ultimately produces an express or implied tax.


Scott Yates said...


Sorry, couldn't find a contact form so I'm writing you here. I'm also in Wash Park.

I'm writing because I'm helping http://KeepVegasOut.com, which is the only organized effort trying to beat back the $6 million Big Gambling is spending on trying to get Amendment 50 passed.

If you write about Amendment 50, I hope you'll link to us. And I hope you do write about it, this thing is a huge gift to Big Gambling that's going to sneak through in a confusing ballot.


Andrew Oh-Willeke said...

While I do not think it is important to pass Amendment 50, I also believe it is relatively harmless.

The proposed changes in how gambling is conducted are benign enough, and I don't have a problem with increasing the stakes for gambling in Colorado.

Betting limitations were invented by casinos for the purpose of making their own profits more consistently high, because in a game where the house wins on average in the long run, a large number of small bets takes advantage of the law of averages to reduce variability from the predicted average profit. They also make it easier to monitor the few larger stakes tables where there is a greater risk of cheating.

In other words, bet limitations hurt the customer, and don't limit problem gambling since there is no limitation on how much a gambler can spend, only on how much a gambler can spend in any given bet.

My primary concern about Amendment 50 is whether the division of tax revenues is sensible, but honestly, I don't see the point in mounting the kind of vigorous opposition to Amendment 50 that your group is mounting.