Obama Chief of Staff Hopes to Exploit the Economic Crisis to Expand the Growth of Government:

In earlier posts (e.g. - here and here) I have emphasized the risk that the combination of economic crisis and unified Democratic control of Congress and the White House would lead to a vast expansion of government. It looks like key Obama advisers and congressional Democrats are thinking along the same lines. As Obama Chief of Staff Rahm Emanuel puts it, the crisis is "an opportunity to do things you could not do before . . . You never want a serious crisis to go to waste." The WSJ article from which the quote comes makes clear that the "things" Emanuel has in mind are government policies that "pick winners" by subsidizing particular industries on a massive scale - as Congress is already doing with the finance industry, auto industry and others (HT: David Boaz).

Given the serious flaws in this kind of central planning, it is highly unlikely that even a well-intentioned federal government could do a better job than the market in choosing which industries to fund. On this point, F.A. Hayek's critique of government planning is still relevant - even more so than I thought when I defended Hayek's continuing relevance earlier this year. In the real world, of course, it is highly unlikely that government planning decisions will be determined by experts whose only concern is the public good. Rather, politically powerful industries will use their influence to lobby for bailouts and other government assistance that will probably be denied to the politically weak - irrespective of the true merits of helping the industries in question.

Interest group pressure has already played a key role in the congressional vote on the finance industry bailout, and it is likely to be equally important in structuring the massive future bailouts to come. Once Obama takes office, we are likely to see some $500 billion to 1 trillion in additional bailout spending - and that may be just for starters. Interest groups will play a major role in allocating this money, and they are already ramping up their lobbying efforts.

The end result will probably be an enormous transfer of resources from taxpayers and wealth-producing industries to interest groups with political leverage. That is likely to serve the interests of those groups and of the political leaders in charge of doling out the government largesse. But it will also impede economic growth by transferring resources away from productive firms to those that are failing.