The Dismal Science

What’s In It for Me?

How congressmen decided whether to vote for the bailout.

House Speaker Nancy Pelosi signs the HR1424 Financial Rescue package bill. Click image to expand.
House Speaker Nancy Pelosi signs a financial bailout bill

In July, the U.S. government got into the housing business with the passage of the American Housing Rescue and Foreclosure Prevention Act, which authorized $300 billion to insure refinanced mortgages. A few weeks ago, the government got into financial services as well with the Emergency Economic Stabilization Act, which gave Hank Paulson and the U.S. Treasury $700 billion to bail out the U.S. banking system. The subsequent lobbying frenzy has many people worried about whether the bailout funds will serve Main Street’s economic interests or line the pockets of special interests.

Chicago Business school professors Atif Mian, Amir Sufi, and Francesco Trebbi have already run the numbers on politicians’ voting records for both bailout packages, and their findings won’t ease concerns about misspent billions. They find that congressmen from foreclosure-ridden districts were far more likely to vote for the mortgage bailout, and lawmakers who received big checks from the financial-services lobby were likely to cast votes in favor of the bank recapitalization plan. Given that the politics of the bailouts has already proved to be focused narrowly on local interests and strongly influenced by special interests, there’s good reason to worry about what will happen when taxpayer dollars actually start getting spent.

Few economists questioned the need for a bailout of some kind, and in theory there’s nothing wrong with politicians working for their constituents—the need to get elected and re-elected naturally pushes representatives toward a focus on the people who vote for them. But serving local interests has also given us bridges to nowhere, studies on human hibernation, and other earmarked expenditures that put local politics ahead of national interests. While both bailout plans were national in scope, some electoral districts will benefit more than others. Using data from a national consumer-credit-information provider, the researchers find that while the country as a whole has been slammed with mortgage defaults—payment on more than one in 20 mortgages was delinquent in the last quarter of 2007—the pain was spread very unevenly. Lots of congressmen’s districts had default rates above 8 percent, while others were closer to 3 percent.

In voting on the mortgage bailout, congressmen responded strongly to local constituencies’ need for government action. About 25 percent of Republicans in Congress cast “yes” votes on the AHRFPA. (The economists look only at the votes of Republican representatives, since Democrats were near-unanimous in their support of the legislation.) Yet among those representing default-battered districts (those with defaults above 7 percent), this figure rises to nearly 40 percent, while only around 10 percent of representatives of low-default districts (below 3.5 percent) voted for the legislation.

The lawmakers proved to be remarkably calculating in casting their votes. Within each congressman’s district, political allegiances vary neighborhood-by-neighborhood. But Republican lawmakers responded to the default rates only in their districts’ Republican-dominated areas. For example, Texas’s District 26 is painted, for the most part, a deep Republican red. But it encompasses a few Democratic neighborhoods as well—and these happened to be the ones hammered by the housing crisis, with default rates of nearly 12 percent. (District 26’s Republican areas, by contrast, had a default rate of below 5 percent.) The district’s Republican representative, Michael Burgess, voted against the mortgage bailout.

Constituent interests also mattered more in competitive districts—the effect of defaults on a representative’s vote was nearly twice as large for congressmen who had an electoral margin of less than 2 percent in 2006.

The bank bailout served a different set of interests. By proposing to buy up many of the bad mortgages that were weighing down bank balance sheets, the government hoped to stop the downward spiral of U.S. financial markets. This would also have the collateral effect of rescuing many of Wall Street’s fat cats, and, needless to say, the fat cats went all-out to ensure the bailout plan would get enough votes to pass.

Some congressmen seem to have been more open to these advances than others. Financial services companies have contributed many millions to political campaigns in the 2008 election cycle (the top donor, Goldman Sachs, has handed out $4.5 million so far), and the researchers found that lawmakers who benefited the most from this largesse were more supportive of the Wall Street-friendly bailout. They calculate that the odds of congressmen well-funded by Wall Street—the 60 or so with contributions above $200,000—voting against the bailout were 30 percent. Among representatives largely passed over by the finance lobby (with contributions below $30,000), the chances of a “no” vote rise to nearly 50 percent. (As with the mortgage bailout, congressmen were also looking out for their voters in the bank rescue plan—legislators representing districts with high rates of finance-industry employment were more likely to cast “yes” votes.)

That said, strongly held beliefs can trump naked political interests. For fiscal conservatives like Texas Rep. Jeb Hensarling, both bills embodied the further intrusions of big government. (The bank bailout would “fundamentally change the role of government in the American free enterprise system,” Hensarling told the press.) So despite more than $450,000 received from real estate and finance industry interests during the 2008 election cycle and a mortgage-default rate in his home district that ranks among the highest in the country, Hensarling voted against both bills. He wasn’t the only conservative with a conscience. Using a measure of political ideology based on congressional voting records, the study found that conservative Republican congressmen were far more likely to vote against both pieces of legislation than their less conservative GOP counterparts and were also less sensitive to voter and donor pressure in casting their votes.

Some corruption and waste may be inevitable in responding to disaster and crisis—we certainly found that out in paying contractors in Iraq and rebuilding after Hurricane Katrina. Yet some ways of responding to emergencies are better than others. There are a lot of ideas out there on how to make the bailouts work effectively to mend U.S. financial markets, including plans for quickly getting banks back to lending and minimizing the bailout funds that leak out to bank owners and executives. How many of these suggestions will be followed? While much has been made of the independence that the Treasury will have in administering the bailout, congressmen have certainly been known to intercede on policy matters in the past. If this analysis of how congressmen made their voting decisions on the bailouts is any indication, political pressures rather than economic common sense may prevail in how the bailout funds get spent.