When writing about who will pay for the bailout package, Paul Krugman wrote something about something subtle. Not the canard of Chinese financing, which I think people asked him about. Yes, China has financed our twin deficits in the current account and on government balance sheets, but the bailout represents something different than more government spending unfunded by tax increases.
It's risk sharing. When the government buys troubled assets or businesses, it is implicitly making the American public hold risk that previously was privately held. There may also be a subsidy involved, but to the extent the assets retain an uncertain value, we're talking about the assumption of risk.
On its own, this creates bad incentives for those private firms and individuals who originally took on the risk and got bailed out. But when all private savers become scared and uniformly decrease their risk exposure, as is currently happening, every business and individual with "risky" debt --- even credit card balances, basically anything that isn't a U.S. government security --- suffers. Then businesses' employees suffer when they get laid off. Then we all suffer.
One could argue that an (i.e., not the only) appropriate action of government in such times is exactly to take on more risk publicly, when it is newly being avoided by private agents, if we view the latter as suboptimal risk holding engendered by irrational fear. (If we think it's rational, that's another story. But do we think recessions are rational? That's a huge can of worms.)
Still, to many it's the rewarding of negligent risk-taking to which people object. Folks on the left and the right in the House despised the idea of bailing out people who "should have known better."
Stepping away from the financial crisis, does this sound at all familiar? In fact, we have a long history of disagreeing about public assumption of private risk in the U.S.
In another form, it is the debate over public health insurance.
Many of the same people who are upset about publicly assuming risk in the bailout are the same folks who are upset about publicly insuring citizens against risks to health. Not everyone, mind you; the left typically favors such moves, while they do not like the bailout.
And it would be wrong to suggest the two types of risk are more than just a little similar. But some of our nation's core beliefs, about individual responsibility and the scope of government, clearly affect perceptions toward both issues.
