There is no free lunch despite what the moochers say

From How much did the bailouts cost? by Tyler Cowen.

The popular argument in the mainstream media and from establishment talking heads has always been that the Great Recession bailouts paid for themselves. The headline arguments have always struck me as naive and lacking economic rigor. Cowen is referencing a paper, Measuring the Cost of Bailouts by Deborah Lucas, which argues that there was a material non-zero cost to the bailouts. From the Abstract:

This review develops a theoretical framework that highlights the principles governing economically meaningful estimates of the cost of bailouts. Drawing selectively on existing cost estimates and augmenting them with new calculations consistent with this framework, I conclude that the total direct cost of the 2008 crisis-related bailouts in the United States was on the order of $500 billion, or 3.5% of GDP in 2009. The largest direct beneficiaries of the bailouts were the unsecured creditors of financial institutions. The estimated cost stands in sharp contrast to popular accounts that claim there was no cost because the money was repaid, and with claims of costs in the trillions of dollars. The cost is large enough to suggest the importance of revisiting whether there might have been less expensive ways to intervene to stabilize markets. At the same time, it is small enough to call into question whether the benefits of ending bailouts permanently exceed the regulatory burden of policies aimed at achieving that goal.

It is just one more data-point.

Regardless of whether the cost of the bailouts turn out to be $50 billion, $500 billion or $5 trillion I think there are deeper costs which will never be quantified.

The first cost comes from the fact that once again the establishment looked after their own over the interests of the entire citizenry. An important element of a free market system is that participants make their best decisions balancing likely return against risk with the knowledge they have at the moment. Risk is the discipline that reduces the misallocation of capital. If you do not pay the consequences of your bad decisions, i.e. if the government nationalizes the losses, then you are making the whole system that much riskier.

The Bush administration knew this and tried to stick to their principles. But there was one bankruptcy too many and they blinked. Next came the bailouts and TARP and continuing trillion dollar deficits and an ever escalating debt. One more time that we defaulted to corporatist tendencies.

What is the strategic cost to our economic system when we encourage, through bailouts, the misallocation of capital?

Who were the direct beneficiaries of these bailouts? The most prosperous segment of society. Not the 70% living pretty much paycheck to paycheck. The 30% who save and invest. More particularly, the top 10% of those savers. Our whole system of government depends on trust and voluntary compliance by all citizens. What is the cost of fostering the belief that only the ordinary people pay penalties, that the government is there to protect the wealthiest from their own bad decisions at the expense of everyone else? What is the cost of the ever ballooning debt and the financial constraints that creates when dealing with future crises?

Those are hard questions to answer and the establishment media, establishment political parties, and the technocratic class are all eager to ignore them.