A Republican Economist For The Bank Tax

The New Republic

You have read:

0 / 8

free articles in the past 30 days.

Already a subscriber?

Log in here

sign up for unlimited access for just $34.97Sign me up

JONATHAN CHAIT JANUARY 15, 2010

A Republican Economist For The Bank Tax

Greg Mankiw, chairman of the Council of Economic Advisors under George W. Bush, explains that President Obama's large bank tax is pretty straightforward economics:

One thing we have learned over the past couple years is that Washington is not going to let large financial institutions fail.  The bailouts of the past will surely lead people to expect bailouts in the future.  Bailouts are a specific type of subsidy--a contingent subsidy, but a subsidy nonetheless.

In the presence of a government subsidy, firms tend to over-expand beyond the point of economic efficiency.  In particular, the expectation of a bailout when things go wrong will lead large financial institutions to grow too much and take on too much risk. ...

What to do?  We could promise never to bail out financial institutions again.  Yet nobody would ever believe us.  And when the next financial crisis hits, our past promises would not deter us from doing what seemed expedient at the time.

Alternatively, we can offset the effects of the subsidy with a tax.  If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.

share this article on facebook or twitter

posted in: jonathan chait, washington, council of economic advisors, greg mankiw, w. bush

print this article

SHARE YOUR THOUGHTS

You must be a subscriber to post comments. Subscribe today.

Back to Top

SHARE HIGHLIGHT

0 CHARACTERS SELECTED

TWEET THIS

POST TO TUMBLR

SHARE ON FACEBOOK