Bailouts could stifle recovery

…technological ingenuity is the key to the prosperity and success of the capitalist economy. New innovations and their implementation and marketing will play a central role in renewed economic growth in the aftermath of the crisis.

But…

A large stimulus plan that includes bailouts for banks, the financial sector at large, auto manufacturers and others will undoubtedly influence innovation and reallocation. This is no reason for not endorsing the stimulus plan, but it is important to consider its full set of implications. Reallocation will clearly suffer as a result of many aspects of the current stimulus plan. Market signals suggest that labour and capital should be reallocated away from the Detroit Big Three and highly skilled labour should be reallocated away from the financial industry towards more innovative sectors .

In other words, for “creative destruction” to work—to secure the reallocation toward innovative activity that is the strength of entrepreneurial capitalism—governments have the political courage to allow destruction to take place.

One of the interesting observations that Ferguson makes is that panicky reactions, like those of the Rudd government suggest they have forgotten the volatile business cycles and economic crashes of the 1960s, 1970s and 1980s that gave birth to, among other things, productivity-driving innovations like the IT revolution. Certainly, the Prime Minister seem to rely heavily on the advice of twenty-something staff, too young to have seen this before. But the Secretary of the Treasury and the Governor of the Reserve Bank? They’re no spring chickens. What responsibility do they take for advising the government on policies that have caused a run on investment funds, or have drained the fiscal surplus without result, or threaten to subsidize incautious (or incompetent) property investors? (There’s a story in the SMH that the Reserve Bank is opposed to this rotten idea).

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