The Bailout and the Broken Window

In a new column, Reason Foundation’s Anthony Randazzo writes:

In his famous essay, “What is Seen and What is Not Seen,” Frederic Bastiat uses the illustration of a broken window to explain the idea of unseen costs. He dispels the misconception that a broken window adds value to society by creating work for glassmakers, noting that the money spent to replace the glass could have been spent on shoes or books, providing work to shoemakers or printers. Creating a demand for glassmakers by breaking a window disrupts market forces and slows innovation. Bastiat explains that this is the unseen cost of a broken window, which strips value from society, instead of adding value to the economy. The wisdom of Bastiat is extremely relevant in an assessment of what unseen economic losses will result from the Emergency Economic Stabilization Act (EESA), the bailout of 2008. Many of the arguments supporting the bailout assumed absolute knowledge of the costs: $700 billion if we act, Great Depression II if we fail. The bailout’s proponents never considered hidden costs such as loan interest, the value of the unknown societal benefits we will never see (because money has been reallocated according to a central planner’s preference), and discouraged innovation. The most apparent cost of the bailout is the interest on the loan (or loans) the government will need to finance the stabilization project. Unlike taxpayers, the government lacks an incentive to avoid high interest charges because they can afford the rate no matter what the cost. There is no telling what interest rates the Treasury Department will get, nor what the final interest payments will be, nor how long it will take to pay back. Treasury Secretary Henry Paulson has said that the government would hold on to the assets it buys for as long as it takes to recoup their value. Even if the government manages to break even by selling the assets it plans on purchasing, this is unlikely to cover the mountain of interest the massive loan will pick up. Yet, the dollars are just the losses that are seen. Bastiat’s unseen losses are much greater and more important to understand.

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