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Is that a $700 billion bazooka in your pocket?

- October 5, 2008

The Secretary of the Treasury now has a $700 billion bazooka in his pocket. Before we forget this past week’s drama, there are some loose ends about the bailout vote we need to sew up.

Let’s start by revisiting our predictions about the switchers. Focusing on the House Republicans, our empirical model (here) suggested that moderates in safe seats should have been more likely than their GOP colleagues to switch sides on the bailout bill. Isolating the safe Republicans from the left-side of the GOP median (and adding the two retiring moderate Republicans who voted against the bill) yielded a list of 16 GOP most likely to switch their votes.

We predicted three of the 16 switchers correctly, for a success rate of 18.75%. Given that 25 of the 199 GOP switched their votes, we would have had a 12.5% chance of picking the switchers correctly had we just thrown darts at Republicans. (Luckily, members of Congress are good at dodging.) In sum, our model offered a fifty percent improvement over chance. Not bad for political science, but not great for wagering. Best not to hire us for putting a man on the moon.

The 25 GOP switchers are a motley crew with little distinction in terms of ideological outlook or electoral vulnerability. In contrast, the 33 Democratic switchers are more liberal and more junior than other Democrats. Interestingly, one-third of the Democratic switchers are members of the Congressional Black Caucus; CBC members were significantly more likely than their Democratic colleagues to switch their votes in favor of the bailout. Press reports suggest that Barack Obama had lobbied many of the CBC members, urging their support for the package. (If you stumble across Obama’s phone logs, please send them along.)

Left unanswered are broader questions of why the House turned around on the bailout and the implications of the week’s events. We offer three observations:

First, they don’t call them sweeteners for nothing. The packaging of a wide range of narrowly (and not so narrowly) targeted tax benefits and other goodies drew support from a small but wide ranging set of legislators. As Diana Evans has argued most recently in Greasing the Wheels, party leaders typically use pork to buy votes for measures that serve the general welfare. Given that the first bailout package seemed to be all pain and no gain (despite Hank Paulson’s assurances to the contrary), we shouldn’t be surprised that party leaders were at first unable to secure passage of a deeply unpopular bill.

Second, the relationship of the vote to the instability of financial markets bears closer examination. After the House defeated the bill on Monday, the stock market collapsed: The Dow Jones industrial average had its steepest one-day point loss of all time and the S&P 500 experienced its worst loss since the 1987 Black Monday crash. Members of Congress reported that constituent calls flipped from bailout anger to economic fear. Although we lack the district-level data to test that explanation, it is certainly plausible that MCs on Friday were responding to the stock market sell-off, viewing passage of the bill as a way to help stocks recover and to avoid blame for their fall. That said, in a textbook case of “buy on the rumor, sell on the news,” stocks tanked after the House passed the bailout bill. This does make us wonder what drove stocks down. The market’s reaction to the initial failure of the bill? Congressional dysfunction in addressing the credit crisis? Expectations that the Paulson plan won’t work?

Third, we don’t yet know what the real cost of the bailout package will be to members (let alone to the economy). Will legislators who voted for the package pay a direct cost come November? Will moderates who favored the bill regret their vote when the primary season for 2010 begins? Will opponents of Jane Schmidt (R-Ohio) remind voters how she was against the bill before she was for it? As another Sarah would say, “You betcha!”

Analysis of the bailout vote only begins to scratch the surface of why, when, and with what consequence Congress chooses to intervene to resolve financial crises.