Taxpayers Are Subsidizing Goldman Sachs and Facebook. So What?

Goldman Sachs' $450 million investment in Facebook raised eyebrows, both because of the dollar figure and the high-low juxtaposition of an all-powerful, enigmatic investment house putting its weight behind a middlebrow online yearbook.

Economist and Wall Street watchdog Simon Johnson says these kind of deals could lead to another painful tech bubble. The thinking goes like this: Goldman Sachs' financing costs are cheaper because creditors know it is "too big to fail." That means Goldman invests money with the tailwind of implicit U.S. subsidies. That not only encourages riskier bets, but also it puts taxpayers on the line if those risky bets don't pan out. Here's Johnson:

Social-networking companies should be able to attract risk capital and compete intensely. They do not need subsidies in the form of cheaper financing, or in any other form.

Social networking is a bubble in the sense that e-mail was a bubble. The technology will without doubt change forever how we communicate with each other, and this may have profound effects on the nature of our society. But investors will get carried away, valuations will become too high and some people will lose a lot of money.

If those losses are entirely equity-financed, there may be negative effects, but they are likely be small - in the revised data after the 2001 dot-com crash, there isn't even a recession (there were not two consecutive negative quarters for gross domestic product).

Johnson doesn't provide much evidence that the Facebook deal is actually a bad investment. His main point is that Washington's implicit support for big banks like Goldman Sachs should call into the question the prudence of this $450 million bet.

But if we should be nervous about government subsidies nudging companies toward bad decisions, there is much more to be worried about than "Too big to fail." The corporate tax code, after all, is pock-marked to death with exemptions and credits to protect industries and prod companies to adopt Washington's values. We use the tax code to pay all companies, not just investment banks, to take on debt rather than equity. We put taxpayer money behind solar energy projects that might fail, and plow money into research universities whose bioscience investments might or might not amount to anything.

Johnson isn't wrong, really. In fact, he's right. The government is implicitly putting taxpayer money behind the Facebook investment. But if economic columnists had cause to question every business decision made with the tailwind of government money, we'd be even more repetitive and boring than we are already. If "too big to fail" poisons Goldman's decision-making, it's the tip of a colossal iceberg.

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well. Bestselling author Mark Bittman teaches James Hamblin the recipe that everyone is Googling.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well.

Video

Before Tinder, a Tree

Looking for your soulmate? Write a letter to the "Bridegroom's Oak" in Germany.

Video

The Health Benefits of Going Outside

People spend too much time indoors. One solution: ecotherapy.

Video

Where High Tech Meets the 1950s

Why did Green Bank, West Virginia, ban wireless signals? For science.

Video

Yes, Quidditch Is Real

How J.K. Rowling's magical sport spread from Hogwarts to college campuses

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

More in Business

Just In