September 23, 2008
The Opportunity Cost of the Bailout
Posted by Gordon Smith

Apparently, the U.S. government has access to $700,000,000,000 that isn't already claimed by this program or that. After recovering from the initial shock of that number, people are starting to realize that the bailout has a substantial opportunity cost: the price of any new initiatives from an incoming president.

On Tuesday Barack Obama conceded the point on the Today program: "Does that mean I can do everything that I’ve called for in this campaign right away? Probably not. I think we’re going to have to phase it in. A lot of it is going to depend on what our tax revenues look like."

Phase it in?

Obama claims, "I think the middle-class tax cut that I've talked about -- 95 percent of Americans getting a tax cut -- is something that still makes sense in this kind of environment."


Ok, by raise of hands, how many of you believe that any President would be able to pull off a tax cut next year if Congress passed the Paulson Plan? Yes, it's true that the Paulson Plan would not require a net expenditure of $700,000,000,000, since those assets we would be purchasing presumably have some value. And it's also true that the Paulson Plan is intended to give a boost to the economy that would increase tax revenues. But all of this will take time to sort itself out.

In the meantime, this seems like the appropriate moment for me to make another completely outrageous claim about the financial crisis: if Congress passes the Paulson Plan -- or anything remotely resembling the Paulson Plan -- the November election will be meaningless.

As I walked to work this morning, I imagined a big hypothetical conspiracy theory that explained the Paulson Plan. No, this isn't the one about how Henry Paulson and his minions are trying to soften their landing on Wall Street next year. Think bigger. This is the one about how Republicans realize that Obama is going to win the election, so their best strategy for avoiding national health insurance and any other expensive initiatives is to tie up all of the nation's resources.

Sorry, nothing left for new ideas, Barack!

Obviously, I am kidding about the conspiracy -- and perhaps I should have added "almost" right before "meaningless" in my outrageous statement -- but I believe the outrageous claim is pretty close to the truth. The President will still make important decisions, including appointing cabinet members and Supreme Court justices, and the President still plays an important representative/symbolic role, but the Paulson Plan would knock out any major new policy initiatives [added: except this one] for a couple of years. At least.

UPDATE: I added "hypothetical" to "conspiracy theory" to retain some basis for my claim that I am not a complete crackpot, but then I found the video below linked (approvingly!) by Frank Pasquale at Concurring Opinions. My imagination looks downright restrained by comparison.

In fairness to Representative Kaptur (Orwell could not improve on that name!), the proposal for mortgage buyouts deserves discussion, but the fact that she and others are raising this possibility reveals one of the major pitfalls of the Paulson Plan: it implies that we have $700,000,000,000 lying around just waiting to be spent. The only issue then becomes prioritizing the spending.

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