Study Finds U.S. Recovery Programs Averted "Depression 2.0"
Friday's news that U.S. second quarter economic growth slipped to 2.4% produced shared concern across the political spectrum about the sluggish pace of the recovery. But among economists if not politicians, there is also an overwhelming consensus that without the Obama stimulus program, things would have been much, much worse. Now, a new analysis from former McCain adviser Mark Zandi concludes that the combined federal interventions beginning in the fall of 2008 prevented the Great Recession from becoming Depression 2.0.
In May, the Congressional Budget Office (CBO) found that the American Recovery and Reinvestment Act (ARRA) had largely succeeded, adding up to 2.8 million jobs and 4.1% to GDP by the first quarter of 2010. Now, the new report from Zandi and Princeton economist and former Fed vice chairman Alan Blinder details the enormous impact of the total federal response under both Presidents Bush and Obama.
As the New York Times explained:
In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration's fiscal stimulus program, the nation's gross domestic product would be about 6.5 percent lower this year.
In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.
In "How the Great Recession Was Brought to an End," Blinder and Zandi's models confirmed the impact of the Obama recovery program:
The effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are broadly consistent with those made by the CBO and the Obama administration.
But their modeling also suggests that the totality of federal efforts to rescue the banking system dating back to the fall of 2008 prevented a catastrophic collapse:
We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government's response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.
For their part, Zandi and Blinder caution that "No one can know for sure what the world would look like today if policymakers had not acted as they did--our estimates are just that, estimates." But whatever questions remain about, say, the bank rescue, the auto bailout or the Obama administration's foreclosure programs, the authors contend:
While all of these questions deserve careful consideration, it is clear that laissez faire was not an option; policymakers had to act. Not responding would have left both the economy and the government's fiscal situation in far graver condition. We conclude that Ben Bernanke was probably right when he said that "We came very close in October  to Depression 2.0."
Sadly, as this week's disappointing GDP numbers suggest, the concern isn't that the federal recovery efforts failed, but that they were too small. Even before the passage of the ARRA, Paul Krugman on January 6, 2009 presciently warned about the political and economic ramifications of the under-sized stimulus:
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we're talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says "See, government spending doesn't work."
Which is almost exactly what came to pass. Despite the incontrovertible evidence of its success, the American public perceives the stimulus as a failure. While Congress eventually passed an extension of unemployment benefits, Senate Republicans successfully stonewalled a $151 billion jobs bill that included critically needed aid to the states. Last week, the Washington Post's Ezra Klein similarly lamented the triple whammy that unfolded:
Ten percent unemployment and a terrible recession ended up discrediting the people trying to do more for the economy, as their previous intervention was deemed a failure. That, in turn, empowered the people attempting to do less for the economy. So rather than a modestly sized stimulus leaving the door open for more stimulus if needed, its modest size was used to discredit the idea of more stimulus when it became needed.
As for Blinder and Zandi, their assessment has some of the same limitations as any counterfactual argument But given the recent history of the Republican Party, this isn't a case of asking what the world would like, say, if Sarah Palin had succeeded in teaching her daughter about abstinence or even if John McCain had never picked her as hs running mate at all. Blinder and Zandi are essentially comparing the gamut of federal recovery programs to doing, well, nothing. Which, for today's GOP, sounds about right.