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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