Barro Has Solved the Financial Bail Out Problem!!

Barro was definitely a little bit conservative for me, but I have to admit, his last chapter was entertaining and hillarious.

I realized reading his analaysis of tax amnesty measures that Barro effectively solved the financial market bailouts that have been happening. I know that as a liberal I am just supposed to love government intervention to death, but nevertheless, I see a slight problem with the financial market bailout by the government. If the government bails out all these companies now, because they made risky investments and went bankrupt, then in the future they will only continue to make risky investments under the assumption that the government will be there to save them if it all goes bad. As someone said, the government is privatizing the profit and making the losses public. Which might not be all bad, except that it sets a precedent for doing it again in the future.

Barro has our solution. As he points out, this works as a solution to all time consistency issues with government policy. Barro suggests that when tax amnesties are offered, it is only really bad, because in the future people will expect more amnesties so they will not pay their taxes in the interrim periods. His suggestion is that we should declare a year long tax amnesty, get all the people that are avoiding their taxes to pay up, then after the year, we should say, "just kidding" and then punish them all for not paying taxes.

We could do this with the financial bailout. We can tell all the companies we are going to buy these loans off them and everything is going to be alright. Then when the companies are back on their feet again, we can fine them heavily and effectively force them to pay back the money they received as payment for the bad loans. This would mean that in the future, there would be no false incentive to go for risky investments with the promise of a government bailout--because the government renegged. It "avoids the moral dilemma of allowing [the companies] to escape [the profit loss they should have experienced]". Finally, it would of course avert economic disaster in the short run with no expense to taxpayers in the long run.

Perfect plan Barro! I like it!