Turning the Economy over to Politicians

January 29, 2009 • Commentary
This article appeared on Real​Clear​Pol​i​tics​.com on January 29, 2009

President Obama insists that there be no earmarks in his $825 billion package of increased federal spending. But that won’t put an end to lobbying and political influence on how the money gets spent. And when politicians get to pick the winners, the economy loses.

Outrage over lobbying and corruption in Washington has spurred calls for campaign finance reform and played a role in the defeat of many Republican incumbents in the 2006 and 2008 elections. Yet the size of government keeps growing, which inevitably means more lobbying and more campaign spending.

We’re seeing this once again with the bailouts and the planned stimulus bill. The $700 billion Troubled Asset Relief Program (TARP), better known as the Wall Street bailout, was cooked up mostly in secret by the Treasury Department and the Federal Reserve Board. But the bill was no sooner proposed than lobbyists started flooding Capitol Hill and the Treasury to get a piece of it.

Every company and industry wanted to be sure that it would be eligible for some of the money, and members of Congress worked to slip their constituents and campaign donors into the bill’s 451 pages. By the time it passed, it included special provisions for Puerto Rican rum producers, auto race tracks, and corporations operating in American Samoa (such as Starkist, which is headquartered in House Speaker Nancy Pelosi’s district). It required that insurance companies pay for mental health benefits and granted tax benefits for victims of the 1989 Exxon Valdez oil spill and makers of children’s wooden arrows.

Once the bill passed, the lobbying frenzy only accelerated. Banks and other companies focused their attention on the Treasury Department regulators. A Treasury spokesman told the Wall Street Journal that political influence played no role in the department’s decisions: “The decisions are made by a committee of officials at Treasury based on recommendations and data provided by the regulators through the application process.”

That’s always the official answer. Put the government in charge of handing out money, and the decisions will be made by highly trained, public‐​spirited economists or lawyers, irrespective of political considerations.

The reality is reflected in a few headlines we’ve seen in the past two months: “Lobbyists Swarm the Treasury for Piece of Bailout Pie.” “Bailout Debate Spawns High‐​Stakes Lobbying Scramble.” “Political Interference Seen in Bank Bailout Decisions.”

According to a Wall Street Journal report, several Ohio banks also got TARP funds after Ohio’s congressional delegation contacted Treasury Secretary Henry Paulson and other regulators. Arizona’s banking superintendent says she’s going to lobby the state’s members of Congress to make sure that banks in other states don’t get “better treatment.” “I think it’s just a question of advocacy,” she says. “It has to be a congressional voice.”

Next up is the nearly‐​trillion‐​dollar stimulus bill. Don’t expect anything different. Already senators are pushing to get their pet projects and home‐​state interests into the measure. “It’s very intense right now,” one Washington lobbyist told U.S. News. “I’m working late every day, until 9 o’clock, 10 o’clock. Every imaginable client has been calling me with ways of how their business, or their projects, should fit into the economic stimulus package. It’s wild. No idea is too far‐​fetched for people.”

Even if regulators are as smart as Leonardo da Vinci and as incorruptible as Mother Teresa, they can never have as much knowledge as the decentralized, competitive market process, so planned economies and planned industries fall further and further behind free‐​market systems. But in reality, even if they’re smart, they’re not incorruptible. Political influence always comes into play. What we’re seeing with the bailout funds will also happen with the stimulus money.

Government planners claim to be able to aggregate all the available information and make informed decisions for the whole society. But market economies clearly produce far more economic growth than planned economies. It isn’t just the United States versus the Soviet Union or East Germany versus West Germany. Consider the customer service and technological advances you get from FedEx versus the post office, or Microsoft and Apple versus the DMV.

If you want money flowing to the companies with good lobbyists and powerful congressmen, then the stimulus bill may accomplish something. But we should all recognize that we’re taking money out of the competitive, individually directed part of society and turning it over to the politically controlled sector. Politicians rather than consumers will pick winners and losers. That’s not a recipe for recovery.

About the Author