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Archive for January 29th, 2010

Like most statists and interventionists, former Treasury Secretary Henry Paulson raises the economic equivalent of monsters under the bed when justifying more government. Here’s a blurb from a story about his recent testimony on Capitol Hill:

…former Treasury Secretary Henry Paulson on Wednesday defended his decision to complete a $182 billion bailout of American International Group Inc., arguing that the unemployment rate would have risen easily to 25% without the bailout. “If the system had collapsed millions more in savings would have been lost,” said Paulson, who was Treasury Secretary at the time of the bailout, at a hearing. “Industrial companies of all size would not have been able to raise funding and they would not have been able to pay employees, this would have rippled through the economy.”

For the sake of argument, let’s assume he is right and that the economy would have collapsed without huge amounts of money being pumped into the financial system. Does that justify Paulson giving money to his friends on Wall Street? Not at all. The crowd in Washington could have used what’s known as the FDIC-resolution approach, which would have resulted in the government paying healthy financial institution to take over the insolvent ones. In effect, this is what happened during the savings & loan crisis twenty years ago. It’s not an ideal libertarian solution since tax dollars are pumped into the financial system and there is some degree of increased moral hazard since consumers/customers have less reason to monitor the safety and soundness of the banks they patronize. But the FDIC-resolution approach has one enormously good feature, at least compared to the Bush-Paulson-Obama-Geithner bailout: Bad banks are shut down, meaning that shareholders lose all their money and senior managers lose their jobs.

There was no justification for bailing out the institutions that went under water. To the extent a system-wide collapse was a real possibility, the FDIC-resolution approach would have worked. Indeed, it would have worked much better since the economy would not be plagued by the zombie banks that are only alive because of handouts from the Treasury (similar to what happened in Japan). But politicians instead chose the approach that was bad for the economy, but good for raising campaign cash and increasing the power of government.

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This may not be as dumbfounding as being told not to advertise for reliable people in England, but I certainly was shocked to see that nearly one-in-five federal bureaucrats is paid more than $100,000 – and that doesn’t even include overtime and bonuses! Or how about the fact that number of bureaucrats making more than $170,000 at the Department of Transportation jumped from one to 1,690. No wonder the average bureaucrat makes 76 percent more than someone in the productive sector of the economy. If you want to get angry, read Jeff Jacoby’s column:

Since December 2007, when the current downturn began, the ranks of federal employees earning $100,000 and up has skyrocketed. According to a recent analysis by USA Today, federal workers making six-figure salaries – not including overtime and bonuses – “jumped from 14 percent to 19 percent of civil servants during the recession’s first 18 months.’’ The surge has been especially pronounced among the highest-paid employees. At the Defense Department, for example, the number of civilian workers making $150,000 or more quintupled from 1,868 to 10,100. At the recession’s start, the Transportation Department was paying only one person a salary of $170,000. Eighteen months later, 1,690 employees were drawing paychecks that size. All the while, the federal government has been adding jobs at a 10,000-a-month clip. Between December 2007 and June 2009, federal payrolls exploded by nearly 10 percent. “Federal workers are enjoying an extraordinary boom time in pay and hiring,’’ USA Today observes, “during a recession that has cost 7.3 million jobs in the private sector.’’ And to add public-sector insult to private-sector injury, data from the Office of Personnel Management show the average federal salary is now roughly $71,000 – about 76 percent higher than the average private salary.

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