Who Wins and Who Loses from a Treasury Bailout?

September 22, 2008

There has been a lot written about the Treasury bailout of financial institutions, both from intelligent people and those who don’t have a clue. Some call it a bailout for those on Wall Street, implying that typical Americans don’t benefit. Is that true? I don’t know. There may be some truth to that. But in order to answer this question of who wins and who loses, we should follow the tax incidence framework, most notably the recognition that who receives the check from the government may not be the same person who benefits. This is the classic legal versus economic incidence distinction in public finance.

So in order to answer this question, we need to ask two questions: (1) What would have happened without any bailout, both in the short-term and long-term? and (2) What happens now under the bailout policy?

The difference between those two scenarios (policy and baseline) and how each person’s welfare differed under the two scenarios will provide the true answer to the question “who wins and who loses from this bailout?” And the answer to this question may be different depending upon the time-frame (long-run versus short-run).

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