the missing US campaign slogan

The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’ 

Economic populism is a body of ideas, often random and irrational, crafted to win over frustrated voters. It tends to be good politics, bad economics, and it’s having a moment in the spotlight. As US presidential candidate Kamala Harris vows to subsidise home buyers and punish price gougers, her rival Donald Trump offers universal tariffs and “no taxes on tips”. Such slogans poll well but are likely to backfire if implemented, raising this question: are there populist ideas that can lift the economy and still win votes?

Here’s one missing in the campaign so far, that fits nicely on a bumper sticker: No More Bailouts! Doling out dollars by the hundreds of billions in 2008, and trillions in 2020, state rescues have helped incumbent companies, undermining competition and productivity. Bailouts are the new trickledown economics, claiming that everyone gains from benefits for the rich and powerful, but in the end only fuelling a sense that the system is failing and unfair. 

The US government has developed a suite of bad habits in recent decades, including more state spending in good times and bad covered by more borrowing, thus almost quadrupling US public debts as a share of GDP. Stopping this snowball would, however, require capping Social Security and Medicare — middle-class entitlements that are so popular neither party dares touch them.

Bailouts, in contrast, are generally unpopular, and capping them would at least moderate the escalating crippling debts and related dysfunction. These rescues are slowing productivity growth by supporting corporate deadwood, clogging the system with barriers that prevent newer companies challenging the entrenched.

In 2008, the authorities injected taxpayer money into giant banks while letting community banks fail by the dozens. The public reacted angrily, compelling Congress to rule out that type of rescue. Then the pandemic hit, and authorities found new ways to pump money into financial markets, and into banks and corporations whether large or small, distressed or not.

In 2023, the economy was in recovery, yet losses at two smallish banks (Silicon Valley and Signature) triggered new bailouts, justified by fear that letting depositors suffer could cause “another 2008” — a systemic meltdown. Every bailout deepens the faith of investors that government will always be there to backstop their bets, which inspires them to take more risk, making the system more fragile — and for authorities, justifying ever bigger, quicker bailouts.

Disrupting this doom loop requires resetting expectations of state relief before the next crisis hits. Companies need to know that losses will not be covered by the state, so their risk-taking becomes more rational. This is not as radical as it may sound, since modern bailout culture is so new.

In its first 200 years, the US organised relief for banks and corporations only twice, in crises of the 1790s and the 1930s. The next bailouts were delivered amid the shocks of the 1970s, for select companies such as Penn Central and Chrysler, over fierce resistance. Critics asked why a democracy would single out a few big corporations for help.

The first bailout of a major bank, Continental Illinois, came in 1984. Later that decade came the first industry bailout, in the Savings and Loan crisis, and the first pledge of official support for financial markets — from Federal Reserve chair Alan Greenspan. By 2008, relief spending reached its no-limit maximalism.

The time to slow this momentum is now, before it does more damage. Since bailouts have undermined the dynamism of the economy, they should be doled out less frequently and tilted towards small enterprises, the main engines of job creation. Authorities do need to stabilise markets in distress, but with a sense of balance.

Increasingly, bailouts are indiscriminate, nurturing “zombie” companies. Authorities would do well to recall Walter Bagehot, the father of central banking, who argued that aid should be used to help solvent businesses endure passing storms, not to keep failing ones alive indefinitely.

Fearful of the fragility they have created, governments now vow to err on the side of spending too much, to prevent a depression. The result in 2020 was way too much relief for too long, driving up inflation, debts and risk in the economy. The size of bailouts should be based on need, not deliberate excess.

The alternative: increasingly financialised capitalism that favours the established, leaving angry voters vulnerable to cynical populism. The answer is practical populism, starting with a call to contain the bailout state.