Home Economic Trends The Cost of Bailout: Who bears the burden in the long run?...

The Cost of Bailout: Who bears the burden in the long run? – Sara F.

The U.S. President, Joe Biden, was put in a very challenging position amid the recent collapse of two large banks. Being part of the Obama administration during the 2008 financial crisis, Biden fully supported the statement of the former President that “There will be no more tax-funded bailouts. Period.”

Little did he know that he would be in the same position 15 years later.

To keep his promise and avoid hurting the sentiments of the common citizen, the Biden administration has signaled that no taxpayer money will be used to resolve the crisis. The administration has laid out a plan that the relief package for the banks will be funded through the Deposit Insurance Fund (DIF). While the DIF is not direct taxpayer money, it is funded by fees from banks. This fee eventually passes on to consumers through service charges such as ATM fees.

The administration was also careful to avoid the word ‘bailout’ due to the negative stigma attached to it. However, many remain skeptical including former South Carolina Gov. Nikki Haley said that Joe Biden is pretending that this is not a bailout and argues that other banks are forced to fund Silicon Valley Bank’s mismanagement. She further added that the bank customers will be ultimately responsible for the cost.

Adam Green, who is associated with the Progressive Change Campaign Committee, said that politicians in either party risk political backlash if they appear to be showing preferential treatment to the wealthy and influential. He further adds, “Whether you call it a bailout or not — that’s what is happening here.”

If we look at the economic indicators, they tell an intriguing story. The relationship between tax and public debt is a purely economic phenomenon. The graph shows the lag effect of public debt on taxation. Before 2000, tax collection is higher than the public debt. After the 2008 crisis, tax collection started to decline and in Q2 2009, it stood at negative 16.3 percent. Whereas, the public debt, after the announcement of relief packages, stood at 25.7 percent of GDP for the same period.

As the economy started to stabilize after 2009, tax collection started to rise as well. Public debt, on the other hand, showed a decreasing trend till another shock hit the U.S. economy. After the 2019 pandemic, both economic indicators show a similar trend as observed after 2008. It can be clearly seen that in the second quarter of 2021, approximately after two years of the pandemic, the tax collection is the highest and stood at 58.96 percent. This is called the ‘lag effect’ and it comes in the long – run.

Let’s see if the same long-run ‘lag effect’ can be observed in other economic indicators. I graphed unemployment and GDP from 2006 to 2022 and the following observations are made:

  • In 2009, the unemployment rate increased from the previous year by 9 percent indicating an economic crisis the economy faced. GDP and tax collection both fell by 3.2 percent and 16.3 percent respectively.
  • In Q1 2010, tax collection increased by 3.3 percent, and GDP increased by 2.3 percent, but unemployment remained at the same level, which is around 9 percent. This indicates an interesting observation. The contribution to GDP comes from government spending, the G component, rather than the consumption, investment, or trade component.
  • In Q2 2011, GDP increased slightly and remained around a 3.8 percent increase, unemployment also shows a similar change as per the previous quarter and remained at 9 percent. The tax collection, on the other hand, increased to 11.3 percent compared to previous years.
  • In Q1 2019, unemployment slowly and steadily reaches 4 percent. The GDP is at 4.2 percent and tax collection is also reduced by following cyclical behavior over the years to 3.1 percent.
  • In Q2 2020, the GDP fell to -7.6 percent, tax collection fell to 25.65 percent, and unemployment rose to 14. 7 percent. This is the highest increase in unemployment during 2006-2022.
  • In Q2 2022, unemployment was reduced to 6.1 percent, GDP increased to 17.36 percent and tax collection increased to 58.96 percent.
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The impact of an economic policy is truly felt in the long run. The economy usually takes time to absorb a positive or negative shock and stabilize as per the changing market factors. However, when government intervenes in the form of bailouts, it creates distortions in stabilizing the economy and the effect can last for more years than it should have.

Brendan Buck, who was an aide to two former House Republican speakers, John Boehner, and Paul Ryan said, “If this is a moment that we get through because they act aggressively and it’s forgotten about in a few months, then this is not a problem for them,”. “But if this becomes a story we’re still talking about a year from now if there are lots of consequences that last for a while, and if it grows, this could be a presidency-defining, changing moment.”

The bailout stories around the world, whether it’s Germany’s bank rescue package of 500 billion euros, Britain’s relief package of Royal Bank of Scotland, or Denmark’s decision to secure Ebh bank’s liquidity, the funding eventually comes from the taxpayers’ money.

But, why? The answer is simple. Tax is an income for a government. The government needs taxation to run its machinery as well as to support relief programs, bailout packages, subsidies, and other public support.

It doesn’t matter how the government chooses to label its aid package, whether as a bailout or as assistance to those affected by the economy, or even as a measure to ensure economic growth, the reality is that both current and future generations will be burdened with the cost and will repay for a long time, especially when the risky and non-responsible players of the economy were allowed to operate again.”