Feeding Taxpayers to the Hungry Tiger?

But no longer. Washington is now backing a $33 billion bailout of Indonesia led by the International Monetary Fund. The U.S. will indirectly provide much of those funds through its support for the IMF and allied institutions. The administration has unilaterally committed another $3 billion in back‐​up credit through the Exchange Stabilization Fund. Explained Treasury Secretary Robert Rubin: “Financial stability around the world is critical to the national security and economic interests of the United States.”

Well, yes, but the financial stability of every nation around the globe? The United States bailed out Mexico two years ago, the reason explained the administration, was that Mexico was unique. Its economy was intimately tied to that of America– the two nations had only recently inked the NAFTA trade accord– and refugees might flood across the border if prosperity was not restored. America’s southern neighbor could not be allowed to fail.

Although the slump in an economy a tenth the size of America’s in no way threatened the U.S., the argument at least had some surface plausibility. And there was only one Mexico. No other developing state could make a similar claim to U. S. aid.

Until now, apparently Indonesia has been liberalizing, but its economy remains bedeviled by inefficient monopolies, insolvent banks, harmful trade barriers, wasteful food subsidies, and political favoritism. Being a relative, or married to a relative, of President Suharto is the surest way to wealth.

Thus, the Suharto government has no one to blame but itself for its problems. The collapse of Indonesia’s currency and stock market forced the regime to inaugurate serious economic reform. The resulting “structural reforms are more important than the size of the [aid] package” observes Indonesian business analyst Pablo Zuanic.

Notably, the changes were necessitated by Indonesia’s problems, not purchased by the promise of Western loans. Jakarta acted because it had to act.

Unfortunately, the bail‐​out package will reduce the Suharto government’s incentive to reform by relieving the pain of financial failure. Observes economist Mari Pangestu, “There are still some untouchables among banks and their customers, and you can’t do anything with the untouchables.” Certainly the regime won’t do anything about them unless forced to do so. Yet today Indonesia is likely to do only the minimum necessary to receive aid. Were Jakarta instead left to its own devices, it would have to adopt all of the reforms necessary to recondition its economy and reassure foreign investors, who tend to be more careful with their own cash than are international aid bureaucrats with tax monies from industrialized states.

Now that Washington has intervened to prop up a country with only a small economic connection to America, what nation cannot expect help? One administration official told the New York Times: “We can’t step into every economic mess.” But what standard says yes to Indonesia and no to, say, Brazil, which has also been suffering severe financial difficulties? How stable will the U.S. economy be if Washington continually underwrites economic failure around the globe?

Moreover, the administration’s proclivity to bail out the profligate creates a danger of what economists call “moral hazard.” The expectation of a subsidy encourages people to act irresponsibly. Federal deposit insurance for savings and loans meant that profits went to the S&L and losses went to the taxpayer not surprisingly, the S&Ls lent wildly and handed taxpayers the bill.

International aid has similar effects. Warns economist Allan Meltzer, “Banks and financial institutions can now act safe in the knowledge that the IMF will provide a safety net to protect them from some, or even most, of their losses.”

Of course, if U.S. taxpayers are lucky, Indonesia won’t need their money, and if it does, like Mexico it will repay their loans. But even such a best case won’t be costless since credit isn’t free. When Washington channels billions of dollars to a foreign kleptocracy like that in Indonesia, it diverts resources from other uses, such as investment by entrepreneurs in America. We will never know how much we have lost in order to promote “stability” in other nations.

Since the administration has proved that it is addicted to wasting taxpayers’ money, Congress should intervene to say no. But blocking U.S. participation in the Indonesian bail‐​out isn’t enough. Lawmakers need to terminate the executive’s ability to misuse the Exchange Stabilization Fund, originally created in 1934 to support the value of the dollar, in cases like this. Otherwise the administration will undoubtedly find more irresponsible foreign debtors to bail out.