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Tuesday, November 25, 2008

Hazlitt Speaks to our Time...

Over fifty years ago (1946), economist Henry Hazlitt commented on the panic bailouts of 2008:
"The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion pictures will lose business, and depression will spread in ever-widening circles. But if industry X, by prompt action of Congress, is saved--ah then! It will buy equipment from other industries; more men will be employed; they will hive more business to the butchers, bakers and neon-light makers, and then it is prosperity that will spread in ever-widening circles."
In his own time, it was the silver and coal subsidy. The Treasury was forced to "acquire, at ridiculous prices far above the market level, hoards of unnecessary silver, and store it in vaults." Similarly, the fixing of the price of coal, below which it could not fall, accelerated the movement of consumers from coal to oil and natural gas.

What is the end result of a bailout? In Hazlitt's words, any attempt to save the X industry by a direct subsidy out of the public till would:
" nothing more than a transfer of wealth or income to the X industry. The taxpayers would lose precisely as much of the people in the X industry gained...And consumers, because they are taxed to support the X industry, will have that much less income with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger. But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in aggregate as much as X industry has expanded. The net result is also...that the capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created."

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