To spend is to tax, as capitalist deity Milton Friedman is said to have put it. If so, over the last several months, we've seen an orgy of tax increases, and potential increases. Time was, that prospect would have set off a revolution.
Consider the spree of actions that have the potential—directly and indirectly—to cost taxpayers money: the government accepting $30 billion of Bear Stearns drecky collateral for a $29 billion loan to JPMorgan; giving investment banks access to the Fed's discount window; assuming responsibility for Fannie Mae and Freddie Mac, guaranteeing money-market funds (up to $50 billion); making a big loan to AIG (up to $85 billion); and now proposing the mother of all bailouts—up to $700 billion.
It's difficult to quantify the costs of these activities for a few reasons. Even though the government has now formally agreed to guarantee the debt of Fannie and Freddie, the White House says it doesn't see the necessity—shock me!—to include the cost of doing so in the budget. In theory, Hank Paulson could drive a good bargain in buying hundreds of billions of dollars of distressed assets. As a result, the government could recoup a lot of the costs of the latest bailout proposal. And most of the other efforts are loans, which are designed to be paid back. To get a sense of how good the government thinks the credit risks are, the Federal Reserve is charging AIG (until last week a Dow component) an interest rate of three-month LIBOR plus 8.5 percent—about 11.4 percent. That's a lower rate than many credit-card customers pay, but a higher rate than most junk-rated companies pay. But it's almost certain that all these bailouts will cost taxpayers tens of billions, possibly hundreds of billions, of dollars. Unless the laws of mathematics are repealed, we will have to pay this money back in the form of higher taxes or lower government spending.
But have you heard anyone in authority asking about the $700 billion bailout: how do you propose to pay for it?
There seems to be a center-based consensus that some form of bailout is of vital importance to the nation's economy, to its image and to the global financial system. I agree. But important national projects are worth paying for. Especially when the projects in question are a sop to an industry that has asked for—and received—so much from Washington in the past decade. Think about everything Wall Street has been given since the late 1990s: cuts in the capital-gains tax, dividend tax and estate tax, cuts in marginal income tax rates, free-trade agreements, low interest rates, light regulation. The promise was that doing the bidding of the financial-services industry would deliver solid growth and boost incomes for everyone. It didn't. This business cycle, in which job growth was generally anemic, ended with median incomes about where they were at the end of the last business cycle. The S&P 500 is basically where it was 10 years ago. Sure, we got cheap mortgages, all the credit we could eat, and some higher corporate income-tax payments for a few years. But now Wall Street wants it all back in the form of bailouts.
So anybody who pops up on television, or in a congressional hearing, to talk about the vital necessity of this regrettable bailout, should be asked to give a sense of how much it might cost and then to come up with a way to pay for it. Two hundred billion dollars? Fine, please delineate $200 billion in spending cuts over the next two years or $200 billion in tax increases to pay to clean up your mess. Which cabinet-level agency should be zeroed out? Which benefits programs cut? Which component of the defense budget gutted? I'd love to hear what former Lehman Brothers CEO Richard Fuld, or President Bush (who continues to cower behind Paulson's large frame) or Goldman SachsCEO Lloyd Blankfein and Morgan Stanley CEO John Mack, whose butts were just saved, has to propose. After all, every dollar spent by the taxpayers cleaning up Wall Street's mess is one more added to the massive and expanding deficit, one more dollar that will have to be paid back with interest.
There are some ideas out there. Jesse Eisinger of Portfolio magazine has floated a tax on securities transactions. Another possibility would be to make the bailed out companies self-insure against their own incompetence, the way banks have done with the Federal Deposit Insurance Corp. And of course Congress should abolish the exemption that allows private equity and hedge-fund managers to pay low capital-gains tax rates for the money they earn managing other people's money.
It may seem silly to ask about the long-term budgetary implications of bailouts in the time of an emergency. When a fire engine is racing toward a four-alarm blaze, nobody stops to worry that speeding will put wear and tear on the engine. And what's another few hundred billion dollars of debt on top of a national debt that already reaches $9.7 trillion? But to not ask this question would be acting recklessly with other people's money. Which is how we got into this mess in the first place.