A few years, I produced a figure which showed inflation-adjusted state and local expenditures alongside inflation-adjusted private GDP.

It’s been some time since I made that chart and so I thought I might revisit the question. This time around, I compared state and local expenditures with overall GDP, not just private GDP.

The results are below (click to enlarge).

State and Local expenditures vs. GDPAfter adjusting for inflation, the economy is about 5.79 times its 1950 size. This is a good thing. It means more is being produced and more is available for consumption. And since the population has only doubled over this period, it means that per capita production is way up.

Over the same time period, however, state and local government expenditures have not just gone up 5 or 6 or even 8 times. Instead, after adjusting for inflation, state and local governments are spending about 12.79 times as much as they spent in 1950.

State and local governments, of course, depend entirely on the economy for their resources. As I put it when I produced the original chart, this is like a household whose income has grown about 6-fold but whose spending habits have grown nearly 13-fold.

I made a movie. Okay, not really. My superb Mercatus colleagues actually made it. And they were kind enough to let me do the voice over. Here it is. If you like it, please share.

Robert Samuelson at the Washington Post is celebrating the auto bailout.

Last December I had a piece in the Post in which I argued that “pro-business” policies like bailouts are actually bad for business. I offered five reasons:

  1. Pro-business policies undermine competition.
  2. They retard innovation
  3. They sucker workers into unsustainable careers.
  4. They encourage wasteful privilege seeking.
  5. They undermine the legitimacy of government and business.

Read my piece for the full argument.

But aren’t things different in the midst of a major economic and financial crisis? Shouldn’t we have more leeway for bailouts in exigent circumstances?

No. Here is why:

First, we should always remember that the concentrated beneficiaries of a bailout have every incentive to overstate its necessity while the diffuse interests that pay for it (other borrowers, taxpayers, un-favored competitors, and the future inheritors of a less dynamic and less competitive economy) have almost no incentive or ability to get organized and lobby against it.

Bailout proponents talk as if they know bailouts avert certain calamity. But the truth is that we can never know exactly what would have happened without a bailout. We can, however, draw on both economic theory and past experience. And both suggest that the macroeconomy of a world without bailouts is actually more stable than one with bailouts. This is because bailouts incentivize excessive risk (and, importantly, correlated risk taking). Moreover, because the bailout vs. no bailout call is inherently arbitrary, bailouts generate uncertainty.

Todd Zywicki at GMU law argues convincingly that normal bankruptcy proceedings would have worked just fine in the case of the autos.

Moreover, as Garett Jones and Katelyn Christ explain, alternative options like “speed bankruptcy” (aka debt-to-equity swaps) offer better ways to improve the health of institutions without completely letting creditors off the hook. This isn’t just blind speculation. The EU used this approach in its “bail in” of Cyprus and it seems to have worked pretty well.

Ironically, one can make a reasonable case that many (most?) bailouts are themselves the result of previous bailouts. The 1979 bailout of Chrysler taught a valuable lesson to the big 3 automakers and their creditors. It showed them that Washington would do whatever it took to save them. That, and decades of other privileges allowed the auto makers to ignore both customers and market realities.

Indeed, at least some of the blame for the entire 2008 debacle falls on the ‘too big to fail’ expectation that systematically encouraged most large financial firms to leverage up. While it was hardly the only factor, the successive bailouts of Continental Illinois (1984), the S&Ls (1990s), the implicit guarantee of the GSEs, etc., likely exacerbated the severity of the 2008 financial crisis. So a good cost-benefit analysis of any bailout should include some probability that it will encourage future excessive risk taking, and future calls for more bailouts. Once these additional costs are accounted for, bailouts look like significantly worse deals.

Adherence to the “rule of law” is more important in a crisis than it is in normal times. Constitutional prohibitions, statutory limits, and even political taboos are typically not needed in “easy cases.” It is the hard cases that make for bad precedent.

Stephen Walters, Professor of Economics at Loyola University Maryland, has written a new book called Boom Towns. I’ve written a review for the Library of Law and Liberty. Here is the beginning:

Capital, in the 21st century, has a bad rap. Many say that because it is the source of “passive income,” it does nothing but pad the pockets of the idle rich, driving a wedge between the haves and the have-nots. It’s helpful, then, to be reminded that capital in all its forms is the source of human betterment. Capital is the accumulated stock of stuff (financial assets, physical equipment, human knowhow, even social connections) that helps us make and do more stuff. So policies that drain capital from a community or discourage its formation in the first place are likely to leave a trail of destruction. This is the central lesson of Stephen J.K. Walters’ Boom Towns: Restoring the Urban American Dream.

Here is another excerpt:

In some cases, reformers’ cures for urban decay have been worse than the disease. Title I of the Housing Act of 1949 is a case in point. It made federal dollars available to cities that bulldozed property in blighted areas and turned it over to private developers. While earlier reforms had sought to replace tenements with public housing, Title I allowed funds to be used for “shiny new office towers, upscale apartments, convention centers, or hotels.” By 1967, some 400,000 housing units had been razed, but only 10,760 low-rent dwellings had been built to replace them. The result was “an intra-urban diaspora” as about two million, mostly Black, residents were displaced. Though it is impossible to quantify precisely, Walters rightly emphasizes the significance of this unfathomable loss in social capital as people were driven from the communities that had sustained them for generations.

After I wrote this, a friend pointed me to this moving Reason video, written and produced by Jim Epstein and narrated by Nick Gillespie:

Corporate welfare spending is not transparent

March 31, 2015

Over a century ago, the Italian political economist Amilcare Puviani suggested that policy makers have a strong incentive to obscure the cost of government. Known as “fiscal illusion,” the idea is that voters will be willing to spend more money on government if they think its costs is lower than it actually is. Fiscal illusion […]

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Three ways states can improve their health care markets

March 18, 2015

I have a new essay, coauthored with two of my former students, Anna Mills and Dana Williams. We just published a piece in Real Clear Policy summarizing it. Here is a selection of the OpEd: Liberals, conservative, and libertarians agree on the goals: Patients should have access to innovative, low-cost, and high-quality care. And though […]

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What is rent seeking? Ask the dino-hunters.

March 9, 2015

I haven’t had much time for blogging lately but I’m going to try to get back into the swing of things. Back in December, I had this to say in Real Clear Markets: The eminent political economist (and my former professor) Gordon Tullock, passed away last month at the age of 92. His greatest contribution to […]

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The Sharing Economy and Consumer Protection

January 7, 2015

(It has been a busy few weeks and I haven’t had much time for blogging). In early December, my colleagues Chris Koopman, Adam Thierer, and I published a piece on the sharing economy and consumer protection regulation. Here is a summary. A few days later, I was on the Diane Rehm Show talking about the […]

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What to expect from a lame duck

November 25, 2014

Two weeks ago, I sat down with CSPAN’s Greta Wodele Brawner to talk about “lame duck” sessions of Congress. Drawing on my research with colleagues Chris Koopman and Emily Washington, we discussed the ways in which roll call voting patterns differ during lame duck sessions compared with ordinary sessions. A few times I struck a […]

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An interesting development in state regulation of wine shipment

November 18, 2014
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Can one state enforce another state’s laws that prohibit direct-to-consumer wine shipment from out-of-state retailers while allowing it by in-state retailers?  That’s the question posed in a recent New York case. The New York State Liquor Authority has a rule that prohibits licensees from engaging in “improper conduct.”  The liquor regulator argues that direct shipments […]

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