Why Not Give Bailout Money to Taxpayers?

In keeping with the theme of shedding a little light on financial topics you may be forced to discuss or have an opinion on at parties, funerals and baptisms, I would like to highlight a common question. It generally sounds something like this...

"Why not give the bailout money to the taxpayers? We'll spend it. If they want to help us, just give us the money? How come the government is still giving it to irresponsible Wall St. companies? Bailing out Wall St. creates a moral hazard."

Those who hold this view are assuming that 1) all bailouts create a moral hazard, 2) giving money to taxpayers in lump sums is preferred and 3) taxpayers will spend the "stimulus" money. I'd like to present a few alternatives to each of the three basic assumptions. And since the party you are speaking with will probably hold the "pro" side, it will be your job to introduce an alternate view (unless you don't care for confrontation, in which case you can smile and nod, or make a trip to the bathroom).

1) Moral Hazards. This is the idea that if people are insulated from their bad decisions, they are more likely to act irresponsibly. Therefore, if Wall St. knows it's going to get bailed out in a pinch it will continue to act recklessly, or so the argument goes. If I have fire insurance then, according to the argument, I would be less vigilant about having fires in my home. But let me assure you, I would be equally concerned about a fire in my home with or without insurance. Likewise, we would expect banks that have received bailout money to continue in rash behavior. But we haven't seen that. In fact, they've pulled back too much and no lending is going on. Perhaps one solution to the moral hazard issue lies in the perceived outcome. For example, most people are ambivalent towards which banks hold their deposits because of FDIC insurance. That's because FDIC insurance offers a quantifiable solution, a known outcome. But a bailout or a house fire creates uncertainty and potentially complex and messy situations. I think the less certain the outcome, the less impact the moral hazard argument holds. As I stated in an earlier post, I don't think shareholders in Bear Stearns, who lost 100% of the value of their shares, or unemployed CEO's, are still running around like druken frat boys looking for more mischief.

2) Giving money to taxpayers in lump sums. I've heard ridiculous numbers running around the internet about how much we'd all get if the government were to cut us a check. I think CNN ran an article today or yesterday showing the number to only be $9,500 (far below some claims of $100k). There is a psychological difference between a windfall (such as a stimulus check) and increased monthly wealth. Americans tend to save windfalls and spend when long-term prospects for personal wealth increase. Which is why...

3) I don't think consumers will spend like we say we will. I'm not going to spend anything extra this month if I think my income will be zero next month. I believe the issue here is perceived job security. Stimulus from 2002 wasn't very helpful, nor was the stimulus from last year (so far). In environments of financial turmoil and uncertainty Americans save bonus money. However, this is why I think President Obama's taxpayer stimulus might actually work. His idea is to give taxpayers a credit by decreasing the withholding amount. Pretty clever. For most, it will amount to an extra $50/mo. in our paychecks for one year. Some economists think that this will help Americans spend money because we see a long term, fixed increase in our take home pay.

To conclude, I'm saying the moral hazard argument should not be overstated, that if the governemenet wants us to spend, then they should attack the heart of the uncertainty--the job market, and that Pres. Obama's proposed stimulus is fairly astute.