The bailout will clearly carry a big bill, likely in the $500 billion to $1 trillion range. As the Post reports today, opponents of Social Security and other government social programs are already using this expense as a rationale for curtailing such spending. When assessing their argument it is important that the financing of the bailout be correctly understood. From an economic standpoint, the cost of the bailout was incurred when the bad loans were made. That was when people built a home, borrowed for a vacation, and spent in some other way that demanded real economic resources in the form of newly produced goods and services. When the government supports a bailout, it is not directly creating demand for new goods and services. It is simply ensuring that money that we thought was already there (e.g. funds in a money market account) does not disappear through a financial collapse. No one is going to spend more because their savings account did not disappear. (They obviously would have spent less if their savings account actually did disappear.) For this reason, the cost of this bailout (like the S&L bailout in the 90s) should be considered an addition to the debt, but not part of the annual deficit. That doesn't make it cheap, but the people who try to scare us with lines about $900 billion or $1 trillion deficits in 2009 are being dishonest. Adding $500 billion to $1,000 trillion to the national debt is a big deal (and it shows the cost of ignoring a housing bubble), but it should not be an excuse to ignore important social needs, like fixing the health care system.
--Dean Baker
