Recommended : Obama and the Carmakers

I recommend the article Obama and the Carmakers: An Offer You Can't Refuse, in today's print issue of The Economist.

It's said that hard cases make bad law, and the same might be said about legislation: difficult crises produce bad policy. I think that is what is happening in this recession.

In business, debts often have seniority - more senior debts, by contract, are supposed to be repaid before more junior debt. Those who hold senior debt get paid first, a privilege they bought by offering better terms on their loans. It's a straight contractual quid-pro-quo. In the Chrysler bankruptcy the government has stepped in to invalidate that principle, effectively giving the unions (where there are more votes) senior rights that they didn't have, and thereby overriding the contractual senior rights of others. This is very bad policy. if the government can step in and change the loan terms after the fact, why should anyone in the future offer corporations better terms in return for senior debt rights? Indeed, why should anyone trust any contract, if the politicians can invalidate it for political gain?

Politicians are not known for their business sense, and this is an example of why one really doesn't want politicians messing about in the economy. They are too focused on the short term (for perfectly understandable reasons, given the way our political system runs), and not focused enough on the unintended long term consequences of their policies.