Is bailing out banks and automakers bad for innovation? In an interesting new essay on lessons from the financial crisis, MIT economics professor Daron Acemoglu argues — among other things — that bailing out the financial sector, automakers and others “will undoubtedly influence innovation” and the reallocation of resources from less productive to more productive parts of the economy. Notes Acemoglu:
Market signals suggest that labor and capital should be reallocated away from the Detroit Big Three and highly skilled labor should be reallocated away from the financial industry towards more innovative sectors. The latter reallocation is critically important in view of the fact that…Wall Street attracted many of the best (and most ambitious) minds over the past two decades and we now realize that though these bright young minds have contributed to financial innovation, they also used their talents for devising new methods of taking large risks, the downside of which they would not bear….
In other words, the U.S.