What Counts as Evidence that the Bailout Worked?
By Bryan Caplan
Back in September, I asked, “How would we know if the bail-out worked?” “Wait and see” doesn’t cut it, because:
If the bail-out happens, how will we know if it prevented disaster?
If unemployment stays under 8%, proponents will say that the bail-out
prevented a recession. But if unemployment hits 8% or higher,
proponents will say that things would have been even worse without the
bail-out. Opponents, of course, will flip things: Good conditions mean
the bail-out wasn’t necessary, bad conditions mean that the bail-out
made things worse…
Unfortunately, if you let people see whether X happens before they
update, you can’t show that they’re being bad Bayesians. You only see
how they updated, not how they would have updated if the news had been
So here’s my request: Tell us how you’re going to update in advance.
I accepted my own challenge, saying in advance that good outcomes undermine the case for the bail-out, while bad outcomes reinforce it. But alas, almost no one accept my challenge, which is why we can now read stuff like this Steven Pearlstein column. Who benefited from the bail-out? According to Pearlstein:
Every investor, every household and every business in the United
States. You may not like the fact that, as a result of these actions,
overpaid bankers were allowed to hang on to their jobs or preserve the
value of their stock holdings. And you may be unhappy that the
financial system remains in such fragile shape that it is still hard
for some people and businesses to get loans they think they deserve.
But let me assure you that things would have been a whole lot worse if
these actions had not been taken.
It’s possible, I admit, that Pearlstein thought all along that “Good outcomes raise the probability that the bail-out is a good idea; bad outcomes reduce this probability.”* But I have to doubt it. If the banking system had tanked despite the bail-out, would he now have a more skeptical view about bail-outs? Or just be saying, “It was too little, too late”?
At risk of Bayesian self-righteousness, I’d like to trumpet, “If you didn’t tell us in advance what would count as a vindication of your position, you don’t have any business patting yourself on the back and insisting that events proved you right.”
* If someone digs up a pre-November Pearlstein statement to this effect, I apologize to him in advance.