Cheryl D. Block (Washington University) presented Measuring the True Cost of Government Bailouts at Brooklyn on Friday at Brooklyn as part of its Faculty Workshop Series.  Here is the abstract:

Recent dramatic federal government interventions to assist private financial markets and individual businesses have understandably generated concern about the ultimate cost to general taxpayers. Bailout legislation enacted by Congress in 2008 and 2009 has provided authority for much of the recent federal government lending and government purchase of troubled assets and equity interests in financial entities. Many refer to the legislation enacted in October, 2008 as the “$700 billion bailout bill.” Press reports about loans to individual companies, such as AIG, also refer simply to raw numbers in amounts disbursed. A simplistic tally of the dollars authorized or disbursed, however, is wholly inadequate to the task of accurately assessing the ultimate cost of various government interventions. Even if some borrowers default on government loans, surely others will repay. Some government purchased assets or equity investments may lose value, and the government may have overpaid for others. Nevertheless, it is unlikely that the government ultimately will get no return at all on funds loaned or invested. In other words, the $700 billion price tag probably overstates the real cost of the bailout legislation, which is likely to be something more than zero, but less than $700 billion.

At the same time, a focus on the raw numbers attached to what I refer to as “overt” bailouts may understate the true bailout cost because it fails to consider more hidden or “covert” bailouts. Although several of the government actions that I classify as “hidden” or “covert” indeed are relatively invisible to the general public, I use the term “hidden” to refer more broadly to potential government costs that are not formally incorporated into the federal budget. So, for example, many of the unprecedented bailout-type actions taken by the Federal Reserve Bank beginning in 2007 have been quite visible to the public. Yet, they are hidden in the sense that potential costs to general taxpayers are not fully reflected in the budget. Still other types of government intervention are not only “off-budget,” but also much more hidden from public view. For example, taxpayer-favorable Treasury Department changes to interpretation of the Internal Revenue Code can dramatically reduce tax liability for certain taxpayers and, thus, reduce general revenues. Some Treasury Department changes in position during the recent economic downturn had a distinctly bailout-like flavor. The general public may not be aware of obscure interpretive changes and the cost of such changes in the form of foregone revenues does not appear in the federal budget.

In order to make better-informed and more efficient allocations of scarce bailout resources, it is important that policymakers have available the best possible cost estimates on different kinds of government intervention. In addition, policy makers should be able to compare the relative economic return from all different types of government bailout-type expense by having all options “on the budget table” at the same time. This article, written in connection with a forthcoming book on overt and covert bailouts, examines the challenges involved in estimating budget costs for different types of overt bailouts. It also explores special challenges in estimating hidden and covert bailout costs and developing mechanisms for taking those costs into account in the federal budget process.