Academic

It is hard not to notice that we have entered a period of enormous government spending and investment. Here and there some non-Keynesians speak up, but for the most part most citizens and academics think there should be some bailouts, some infrastructure investments, some climate change investments, some education initiatives, and some health care "reform." Some combination of the Lame Duck Bush Administration, the Obama Election, and most especially, the current recession has brought on the beginning of a serious spending spree and an important period of central planning and control. And think of the discretion "enjoyed" by the Treasury and other government units. Detroit may be bailed out by the unilateral decision of Treasury officials loosely interpreting Congressional language in TARP; there is amazing discretion in deciding which banks to support and which not; and the list goes on. But the way to think about this enormous relocation of decisionmaking to the public sector (whether the executive or a more careful and confident Congress) is to think at the same time of the disinclination of individuals and other investors to put resources directly in the private sector.

The automobile companies cannot raise money on their own. Few investors are plowing their funds into banks. T-Bill rates are so close to zero because people are looking for a safe mattress, and fear that any "real" investment will simply lead to losses. Note that funds are not flying out of the country and in to China or Germany, because investors do not have more confidence in private investments overseas. Somewhat similarly, money has left hedge funds and is currently parked, rather than affirmatively invested. Investors may have views about the relative promise of various industries, but they hold back because strong-form intervention by the government provides a large amount of uncertainty.

One way to think about all this is that investors have essentially delegated to the central government that which many of us would have liked investors to undertake. We wish the market would decide how and whether to invest in U.S.-made small cars, in some banks rather than others, in some states rather than others, and so forth. But investors in this environment have preferred to park their money is safe places where they have no means of expressing these judgments.

If we really believe in markets and in decentralized decisionmaking, then we might contemplate new legal rules that encouraged private investment allocations. It is hard to manufacture such rules without creating problems. Thus, one can imagine a regime that gives investors a guaranteed low rate of return and then a share of profit ahead of other claimants. Put differently, if the government manages to get superpriority (in bankruptcy terms) when it puts resources into banks, homes or automobiles, then perhaps we should instead experiment with offering the same to some private investors in order to benefit from their expertise in choosing among investments in these sectors. And yet, to do so is to encourage excessive risk-taking, because the investor shares (presumably) in the upside and not the downside.

In short, investors have "chosen" to invest in safe assets and so, in turn, the government is, even more than usual, in the position of making choices where we might prefer more signals from the private market. For that reason, it is a bit misguided to complain about all the central decisionmaking and to insist that private markets would do this better. at the same time, legal rules have something to do with this allocation of investment decisions between the public and private domains. the government can take taxes, warrants, and super-priorities where the private investors cannot. It is possibel that we could design laws that would create more of a level playing field between the sectors, but that would be a radical departure from the past, and would seem to discriminate between past and present private investors.