Sunday, September 28, 2008

The Bailout, the Election, and Strategic Politics

I gather from news reports that:

1. Most of the U.S. political leadership, including both condidates, supports the bailout.

2. A sizable majority of the electorate is at least suspicious of the bailout. One congressman reported that his mail and email was running 50/50—50% "no" and 50% "hell no."

3. Obama appears to be opening up a substantial lead over McCain in the polls.

This suggests an obvious opportunity for McCain: Come out against the bailout, with some plausible sounding explanation of why he was initially for it. It's risky, but if he is going to lose anyway it might be worth taking the risk.

McCain has not done it, and surely knows more about how to win elections than I do, which raises some interesting possibilities.

Suppose McCain, and those around him, are interested not only in winning this election but in longer term consequences for McCain and the Republican party. It may make sense for themto support the bailout, not because it is a good idea but because future events are more likely to look like evidence for the bailout than like evidence against it. Consider the possibilities:

1. No bailout, the economy does terribly. Opponents of the bailout look terrible—whether or not the bailout would have worked.

2. No bailout, lots of investors lose a lot of money, the current recession continues for a while. Opponents of the bailout don't look terrible but neither do supporters, who will argue that things would have gone much better with the bailout.

3. Bailout, the economy does terribly. Supporters of the bailout will argue that this is evidence of how much worse things would have been without a bailout—and who can prove them wrong?

4. Bailout, the current recession continues for a while. Supporters of the bailout will claim to have saved us from a depression.

Looking at these alternatives, it seems plausible that if the bailout has no effect either way on the condition of the economy, a politician is better off supporting it. Only if the bailout makes worse outcomes substantially more likely or if some bad outcome directly associated with the bailout occurs, such as spending 700 billion and then having lots of firms fail anyway six months later, does opposition look like an attractive long run gamble.

I have a feeling that this argument could be generalized. One ought to be able to predict at least some patterns of political outcomes by asking what policies are more likely to be followed by outcomes that look like clear evidence for or against them. The point is related to the familiar observation that one would expect politicians to design programs whose benefits are easy to see and whose costs are hard to see.


Chris Bogart said...

When weighing the benefits and costs to the politician, I think you have to also include some notion of integrity. If McCain actually thinks the bailout will prevent another Great Depression, it's a strong incentive for him to support it, even if opposing it might benefit him. Nobody wants to see themselves as evil.

Anonymous said...

About a year ago, I had some similar thoughts about the Iraq War: to wit, that Bush would pull out a significant number of troops in the few months before this fall's election, and get credit for this action.

If chaos ensued, he'd be able to say "See, I told you it was a bad idea, but the Democrats in Congress forced me into it. Thank God I didn't give in to them sooner, or it would have been even worse."

If chaos did not ensue (any time soon), he'd be able to say "See, my carefully-planned strategy was successful. Thank God I didn't give in to the Democrats in Congress and pull the troops out sooner, or it would have failed."

For that matter, somewhat the same reasoning is sometimes used in the abortion debate: we know about the valuable individuals (Beethoven is often cited) we might have lost if abortion were more readily available, but we'll never know about the ones we might have gained (through more parental care, less poverty and malnutrition, more education, whatever). So, regardless of whether or when abortion is a good idea, there will always be more a posteriori evidence against it than for it.

Anonymous said...

Homer: Not a bear in sight. The Bear Patrol must be working like a
Lisa: That's specious reasoning, Dad.
Homer: Thank you, dear.
Lisa: By your logic I could claim that this rock keeps tigers away.
Homer: Oh, how does it work?
Lisa: It doesn't work.
Homer: Uh-huh.
Lisa: It's just a stupid rock.
Homer: Uh-huh.
Lisa: But I don't see any tigers around, do you?
[Homer thinks of this, then pulls out some money]
Homer: Lisa, I want to buy your rock.
[Lisa refuses at first, then takes the exchange]

Anonymous said...

"If McCain actually thinks the bailout will prevent another Great Depression, it's a strong incentive for him to support it, even if opposing it might benefit him."

If he believes that, that would be evidence that he's delusional, since even the brightest minds in finance can only take a wild guess.

Anonymous said...

"3. Bailout, the economy does terribly. Supporters of the bailout will argue that this is evidence of how much worse things would have been without a bailout—and who can prove them wrong?"

Plus you can always support another bailout. Eventually one the bailouts will coincide with economic recovery, thus "proving" that the bailout worked.

WhiskeyBoarder said...

Dr. Friedman:

As a young man and budding Libertarian traveling through academia, I have followed your blog for some time after initially encountering it while researching about your father.

I have recently been dealing with the issue of the bailout as you have done in this post. On my own blog, I shared the products on my thoughts on the issue. What’s important: I concluded by asking what, hypothetically, the esteemed Milton Friedman would advise in these troubled financial times.

I do not know your comfort level in speaking on the behalf of others. However, I can hardly think of anyone more qualified to answer my post’s hypothetical pondering. I would greatly appreciate, should you have the time and inclination, if you would address the prompt. I truly wonder what the giant of free-market capitalism would advise in a crisis where the only suggested solution is the deliberate manipulation of the economy.

Anonymous said...

It seems like the only thing missing from your 4 possible future world analysis is the fact that elections are coming up in ~6 weeks. By then, every Congressman would have had to take a position on the bailout, but we quite likely still won't know at that point what direction the economy is going to take in the short- to medium-term. Given this uncertainty, it would make sense for self-interested politicians to vote for the bill based upon whichever direction the prevailing winds of public sentiment are currently blowing. Of course, it's possible they care about the future reputation of their party and/or are not totally self-interested, in which case the analysis becomes murkier.

David Friedman said...

Steve asks what I think my father would say about the situation. I've been thinking about that question as well, and regretting that he is no longer here to be asked.

My guess is that he would view a $700 billion bailout as a massive overreaction, a little of which might help prevent problems with failing banks, most of which would go to keep people from having to pay the cost of their mistakes.

WhiskeyBoarder said...

Dr. Friedman:

I couldn't have imagined such a prompt response, but I greatly appreciate it.

I suspect your response to be right-on. In reaction, I would only ask how such powerful people could be so blind to the perils of moral hazard being presented with this bailout. Perhaps "blind" is the wrong term. Rephrasing, I wonder how publicly elected officials could be so willfully ignorant to the moral hazard associated with this bailout.

Then again, the bill was shot down, so maybe there is still hope.

Thank you for the response.


Steve B.

John Fast said...

There is an excellent comment at

"[I]f it doesn't pass and everything goes to Hell, the Dems won't be able to blame [Republicans] because the Dems have a majority. If it doesn't pass and everything doesn't go to Hell, it wasn't urgent. If it passes and everything goes to Hell, they were right. And if it passes and nothing goes to Hell, they stood on principle."

Let's see, how does that correlate with your analysis of McCain's options?

Anonymous said...

#3 already happened - in the 1930's.