What would Ayn Rand do?

In the January 14, 2009 Free Exchange blog article "What would Ayn Rand do?," an Economist correspondent considers modern parallels to the novel Atlas Shrugged.

AYN RAND is rolling in her grave, according to Stephen Moore.

In ["Atlas Shrugged"], these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?

These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.

The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."

I bet Hank Paulson never thought he’d find himself accused of being opposed to competition when he took this job. It reminds me of an ongoing debate I’ve been having with a friend from graduate school (in a secure academic job). She is also from eastern Europe and has seen her share of crisis and harmful government intervention. She maintains the whole mess will be over more quickly if we just let the weak banks fail. Propping them up merely prolongs the crisis because the market can not distinguish between good and bad banks. She reckons we should just deal with the short-term pain of some banks failing, firm bankruptcy, and job loss and move on when the market re-equilibrates. Her experience growing up during communism speaks louder to her than lessons from the Great Depression.

Normally, and I never imagined I would feel differently, I’d agree with my friend and the John Galt-ites. But these are not ordinary times. The problem is that we’ve reached a point of market failure and uncertainty. It's impossible to tell who the weak banks are. No one involved wants to admit it now, but the justification at the time for not bailing out Lehman was at least partly based on these market principles. This caused widespread panic, and it looked as though a total banking collapse would take place absent a government guarantee. No one knows what the assets they have on their balance sheets are worth. This means there is no lending when there should be; firms who in any functioning market would get credit are left in the lurch.

I am all for market discipline, I would even argue that market distortions from the meddling government sowed the seeds of this crisis. That may be why we need intervention to get out of it. Unfortunately, that means firms, and entire industries, who have no business getting government money are going to receive cheques. But, as Ben Bernanke says (a man who also probably never saw himself on this side of government), "There are no atheists in foxholes and no idealogues in financial crises."