The Treasury Department of the United States has released its latest analysis of the various bail-outs enacted during this and the previous Presidential Administration, and not surprisingly, the outlook is good. The government frames the analysis of its own policies in terms of investment return. The Troubled Asset Relief Program (TARP) housing programs and the conservatorship of Fannie Mae and Freddie Mac will account for significant losses for the American taxpayer, but according to the analysis, these losses are more than offset by expected “Federal Reserve excess earnings” of $179 billion through 2015 as well as by expected gains from the government’s investment in AIG and the Treasury’s Mortgage Backed Securities Purchase program.
This accounting seems a bit sketchy, and the issue was raised by Gretchen Morgensen at the New York Times. The analysis neglected an important aspect: costs versus benefits. A cost-benefit analysis would help inform taxpayers whether the series of bailouts constituted an effective approach. Focusing on return of “investment” — whether these programs made money for the American taxpayer — is the wrong approach to analysis. The goal was not to make money, but to prevent the economy from collapsing.
That safety net can only come with a cost, and that cost might not be apparent. You can easily hide costs in an analysis that ignores the effect of an increased money supply as well as the missed opportunity to invest the same money elsewhere (opportunity cost). A cost-benefit analysis furthermore needs to accept certain assumptions about what might have happened to the economy of the United States had the government allowed entire industries to collapse.
It’s not difficult to use selected financial information to indicate the taxpayer bailouts will break even or possibly result in some kind of profit, and the desire to couch the success of any endeavor in the financial return is the result of a capitalistic society. Bailouts, however, are in effect a socialistic (societal) approach to capitalism: all taxpayers chip in to help selected industries, for the Greater Good of the economy, and you can’t measure social (societal) programs in capitalistic terms such as “return on investment.” You can look at the outcome, in this case, an economy that has been improving despite high unemployment, and compare that with the likely outcomes that would exist if the bailouts were not initiated. That’s a hypothetical situation that economists will never agree upon.
The idea that the bailouts need to earn money for themselves seems to be a way to placate those who need an excuse for the expenditures within a frame of capitalism. This analysis is saying that both the Republicans and Democrats, all generally agreed on the flurry of bailout programs, are justified in approving these measures, but the justification only works when there aren’t significant holes in the financial analysis. It’s better to justify the bailouts by pointing out the overall health of the economy compared to likely alternative scenarios while admitting this benefit to all came at a cost to taxpayers.