THINK ACT

Do bailouts work?
Comeback kid
Keynes?
Government bailouts enjoyed a worldwide renaissance during
the recession, but what do they actually achieve? Nils aus dem Moore
asks whether the kind of intervention favored by British economist
John Meynard Keynes serves any purpose
RESCUE PLANS: Do they work? There’s
never been a better time to ask this
question, never in human history have
these plans been used on such a large
scale by so many countries. On average,
they cost around 2% of GDP in
2009, and 1.6% in 2010. An IMF
analysis shows that the biggest bailouts
were in the United States, with a budgeted total of
4.8% of GDP in 2009 and 2010, followed by China (4.4%)
and Germany (3.4%). Another study, by the Brookings
Institution in Washington, D.C., shows that the nature and
size of the rescue packages varied a great deal. For example,
Brazil and Russia relied almost entirely on tax cuts, while
China and India focused on investment. In the European
Union alone, over 350 individual programs had been agreed
upon by February 2009.
A detailed study by the Brussels think-tank Bruegel found
that countries varied a great deal in their emphasis on the
fi ve key components of a bailout: government investment,
temporary or permanent tax cuts, welfare increases, employment
programs, and aid for specifi c sectors. Germany
implemented a large package of all fi ve, Britain relied mainly
on a temporary reduction in VAT, Austria created permanent
tax cuts, and Poland relied solely on infrastructure
investment.
So were the programs successful? At first
sight, Germany appears to tick all the boxes; the
Eurozone’s biggest economy saw a 5% slump
in output during 2009, launched the EU’s
biggest bailout at a cost of EUR 85 bn, and
staged a spectacular comeback in 2010. Since
then, unemployment has reached new lows
and output has risen to pre-recession levels.
This does not prove that the rapid recovery
was caused by the bailout, or prove that
the more money you put into a bailout, the
more you get out. The United States’ experience
has been quite different; according to the Congressional
Budget Office, the American Recovery and Reinvestment
Act (ARRA), passed in February 2009, will have cost USD
830 bn by 2019. In spite of the program’s huge size, the
recovery has been much slower than previous recoveries.
To find out whether bailouts work, it’s not enough simply
to compare different countries and their economies. To
analyze their effectiveness, you have to isolate their impact
20 THINK ACT SEPTEMBER 2011