Co-blogger Eric Posner notes that most economists believe that the bailout passed today is not a good idea, but argues that it is still justified on the grounds that most of them still believe that it is better than nothing. I am not convinced that this is so clear. Summaries of economists’ views by Alex Tabarrok, John Lott, and Lynne Kiesling suggest that many of them do not believe that today’s bill was better than nothing. As I discussed in this post, I also think that the September 24 letter signed by numerous economists raised categorical objections to the bailout that have not been addressed in later bills. Readers will have to decide for themselves whether my interpretation of the various economists’ statements is correct or not. [UPDATE: I’m not claiming that there is a consensus that the bailout is worse than nothing; merely that there isn’t a strong consensus the other way].
The more important point, however, is that “bailout or nothing” is a false posing of the alternatives. For what little it’s worth, I too believe that “something” should be done; at the very least, I don’t know enough to doubt the economists’ judgment on that point. It doesn’t follow that the bailout was the only available “something.” Had it been definitively defeated, political pressure would have grown for alternative remedies, including the “recapitalization” approach that Eric says seems to be the consensus pick of most economists. As Alex Tabarrok points out in the post linked above, “the consensus policy of economists would put most of the burden of adjustment on politically powerful holders of equity and bonds.” Not only would this approach be better from a distributional point of view (putting most of the burden of adjustment onto those interest groups that played a big role in bringing on the crisis in the first place). It would also help arrest the slippery slope process towards additional bailouts for other interest groups that the bill passed today is likely to generate. Interest groups would hesitate to lobby for bailouts of their own if they knew that they would have to pay most of the cost of any bailout themselves.
As Lynne Kiesling suggests (here and here), the rush to the bailout may be a classic instance of powerful concentrated interest groups (the finance industry, big investors, possibly other industries hoping for later bailouts of their own), triumphing over a less well-organized general public. If the bailout had been taken off the table, these groups might well have been willing to support alternative proposals to address the crisis that would have placed fewer burdens on the general public and had fewer interest group giveaways attached. Forced to choose between A) letting the crisis continue, and B) recapitalization that they would have to (largely) pay for themselves, the interest groups would likely opt for the latter (assuming that the crisis really is as severe as Eric and others claim, which I think is probably true).
An obvious objection is that any alternative bill would have taken too long to put together. But if Congress was capable of cobbling together the bailout bill within a few days, I don’t see why it could not act just as quickly on an alternative – especially given the political pressure for it do so that would have resulted from a definitive defeat of the bailout.
Finally, Eric suggests in his post that the federal government already has the power to impose recapitalization on troubled firms under current law. Indeed, it seems to have already done so in the case of Washington Mutual, which was recapitalized through “speedy bankruptcy” procedures without any significant expenditure of public funds. If Eric is right that the feds already have the power they need under existing laws, to my mind that seems to further undermine the case for the bailout as the only alternative to “doing nothing.”
Perhaps none of this matters now that the bailout has passed. However, I still think that it is important for two reasons:
First, it suggests that we should be wary of using the bailout bill as a model for addressing future crises – or future episodes in the current crisis, which may not be over yet. Second, it strengthens the broader case for paying attention to the risks of broad expansions of government power in times of real or perceived emergency. We should not forget the example of the Great Depression, when many harmful policies were imposed in the name of immediate necessity – policies that failed to end the Depression as had been hoped, but did benefit powerful interest groups in ways that often imposed great harm on the general public.
Maybe there is something I am missing here. Certainly, I’m not thrilled about disagreeing with a law and econ scholar of Eric’s stature on this question. While I am no expert on the economics of banking, I do know a good deal about the literature on ways in which interest groups and governments take advantage of crises to expand their power. And I fear that this crisis poses a serious danger in that respect. If finance economists across the political spectrum really did believe that the bailout is the best available policy choice or close to it, I wouldn’t have anything to say about it. But, as far as I can tell, that doesn’t seem to be the case.