Bailing out the middle class

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It seems to me that the Federal Reserve and government regulators are largely propping up the lifestyles not of the middle class in general, but of various individuals who made choices that turned out badly and prefer not to live with the consequences. These include people who bought houses they now can't afford, executives at banks such as Bear Stearns (where the last-minute decision to quintuple the price of the bank's buyout was worth roughly $50 million to one top executive alone) and people who invested in reckless institutions like Fannie Mae.

Only a small number of these people are blameworthy.

Most simply made reasonable choices that didn't turn out very well. But people make reasonable choices that don't turn out very well all the time, and we don't bail them out. What about the people who bought SUVs just before the prices of those vehicles fell? Should they get bailouts? Should the government reimburse everyone who made the mistake of "upgrading" to Microsoft's Windows Vista?

When you shield people from great risks, you deny them the opportunity to earn great rewards. The culture of bailouts raises the price of risky assets, which makes it harder to get rich by buying them. We all have different risk tolerances, so it's a good thing that the market offers a great range of options.

When you make the riskiest assets less risky (and simultaneously less lucrative), you reduce that range of options. At the same time, you dilute the incentive for shareholder oversight, which leads to lower productivity, lower incomes and lower wages. In the long run, that's no favor to anybody.

Steven E. Landsburg is a professor of economics at the University of Rochester, a columnist for Slate and the author, most recently, of "More Sex Is Safer Sex: The Unconventional Wisdom of Economics."

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Wow, that's some tendentious wording on today's question -- "trying to prop up the comfortable lifestyle of the middle class." Leaving aside the complicated issue of just what the middle class really is, in American mythology, everyone is a member of the middle class, except maybe the hopelessly poor and the mega-rich. So why shouldn't government policy try not merely to "prop up" but actually raise the living standards of the bulk of the population? Since, as I pointed out the other day, the income of the bottom 90% of Americans -- roughly those with incomes below $100,000 -- are 5% below what they were almost 30 years ago. If government policy has been to prop up those living standards, it's doing a pretty bad job of it.

Enough disputing the premises. Steve, you make it sound as if the people who've been burned in the housing bust were roulette players who just picked the wrong number. For the better part of a century, American public discourse and government policy have promoted homeownership as a civic virtue and a sure route to wealth accumulation. I never bought either argument personally, but in the words of the old Kinks song, "I'm not like everybody else." (Former Federal Reserve Chairman Alan Greenspan even told us to take out adjustable-rate loans at generation-low interest rates.) It's pretty callous to blame people for doing what everyone's told them is the right thing -- and then when things turn sour, tell them they should have known better. Besides, in some parts of the country, housing costs are so high that buyers had little choice but to take out creative mortgages in the hope that would work out in the long run.

Ah, shareholder oversight. Aside from the fact that I wonder why shareholders, who tend to be some of the richest people on Earth, should be given a supervisory role over anything, I would like to cite the recent history of the shareholder revolution. Ever since economist Michael Jensen started writing papers in the late 1970s about the need for shareholder assertiveness, and since takeover artists started putting his ideas into action in the early 1980s, Wall Street has played an ever-larger role in the running of corporate America. They were backed in this by efficient market theory, which "proved" that stock prices were the best real-time report card on corporate management. So getting the stock price up became the Holy Grail of management.

Underscoring the point was the rejiggering of executive compensation, away from direct salaries and toward stock-linked pay schemes such as options. The idea was to align the interests of managers and shareholders.

While it made a lot of CEOs and deal makers really rich, the beneficial effects on the American economy are hard to name. Productivity's up about 40% since 1995 -- but the real hourly wage is up just 10%. All that cash the guys at the top have been taking home has to come from somewhere, and that 30-point gap is one very rich source. Whole industries have virtually disappeared, and the U.S. is more than $5 trillion in debt to the outside world. How did the shareholders miss the disasters in the making at Enron and Bear Stearns?

Could it be that rising stock prices dull the critical faculties?

Could it be that great rewards for Wall Street means great risks for the rest of us?

Doug Henwood edits the Left Business Observer and is the host of "Behind the News," a weekly radio show in New York and Berkeley. His latest book is "After the New Economy."

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