The Political Economy of TARP: A Public Opinion Approach

Abstract:     
The Troubled Asset Relief Program (TARP) is at once one of the most hated, misunderstood, and effective policies in modern economic history. Explaining the contrast between TARP’s performance and public and political opposition is a challenge of political economy. In concert with other policies executed by the federal government, TARP was responsible for restoring financial stability at a time when systemic failure in the banking system threatened to bring about a downturn of a magnitude not seen in the United States since the Great Depression. Not only was financial stability restored in short order, the ultimate budgetary cost is likely to be quite modest. I use two survey datasets from the Pew Research Center to document the extent to which TARP is misunderstood and believed to be ineffective. Furthermore, I investigate the root causes of these opinions using extensive data on the demographics of survey respondents. I find that knowledge of TARP is dependent in particular on education, party affiliation, and sex. I use these relationships to construct an index of TARP knowledge and apply it to a separate dataset. Controlling for partisan effects, views on TARP’s effectiveness are distorted by limited knowledge of TARP in magnitudes that are politically significant.

Number of Pages in PDF File: 21

Keywords: TARP, Troubled Asset Relief Program, public opinion, financial crisis

JEL Classification: G21, E63, H81, D72

working papers series