The Path, The Road, The Depression Not Taken

Sewell Chan at NYT:

Like a mantra, officials from both the Bush and Obama administrations have trumpeted how the government’s sweeping interventions to prop up the economy since 2008 helped avert a second Depression.

Now, two leading economists wielding complex quantitative models say that assertion can be empirically proved.

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.

The paper, by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics, represents a first stab at comprehensively estimating the effects of the economic policy responses of the last few years.

Calculated Risk:

I’ll post a link tomorrow (if it is available). David Leonhardt adds:

As Mr. Blinder and Mr. Zandi note, their estimates of the fiscal stimulus are similar to the estimates of othersincluding the Congressional Budget Office.

Although Zandi completely missed the housing bubble, I’ve been using his estimates of the impact of policy (and estimates from Goldman Sachs), and I think they have been very useful in forecasting.

Brad DeLong:

It is very nice to see that they are attempting this. The hard part of it, of course, is figuring out what would have happened to the flow-of-funds through financial markets in the absence of TARP, of quantitative easing, and of other extraordinary financial policy interventions. That they were, collectively, about twice as big as the ARRA smells right to me, but the only pieces of information I have to support that are even shakier than back-of-the-envelope calculations.

Derek Thompson at The Atlantic:

When I go to conferences with conservative economists, I often hear the line: “Now that we know the stimulus isn’t working…” I want to respond, what do you mean by “working”? The first few hundred billion dollars went primarily to three things: tax cuts, Medicaid funding, and state rescue. The tax cuts were pocketed as families paid down their debt, and the state funding mostly salved budget wounds that would have bled out in a worse recession. It wasn’t a stimulus. It was a stopgap.

Today, economists Alan Blinder and Mark Zandi release a new analysis of the recession that reaches a similar conclusion. Yes, the economy stinks today. And yes, it would have been a lot worse without the stimulus, or TARP, the stress tests, and the Fed actions. The stimulus didn’t fail. It just didn’t succeed enough. When I read that over, it sounds like shady justification. But there’s a difference between something that doesn’t work, and something that works, but is insufficient. To cop Blinder’s analogy, the Recovery Act was a baseball team that scored a healthy 7 runs, and lost 20-7.

Stephen Spruiell at The Corner:

Blinder and Zandi still give the stimulus credit for saving (or creating?) around two million jobs, but I suspect this has more to do with the assumptions built into their models than with any empirical evidence to that effect. The Times is good enough to acknowledge this as well:

Told about the findings, another leading economist was unconvinced.

“I’m very surprised that they find these big impacts,” said John B. Taylor, a Stanford professor and a senior fellow at the Hoover Institution. “It doesn’t correspond at all to my empirical work.”

Mr. Taylor said the Fed had successfully stabilized the commercial paper and money markets, but he argued that its purchases of $1.25 trillion in mortgage-backed securities have not been effective. And he said the Obama administration’s stimulus program has had “very little impact and not much to show for it except a legacy of higher debt.”

The disagreement underscored the extent to which econometric estimates are heavily reliant on underlying assumptions and models, but Mr. Blinder and Mr. Zandi said they hoped their analysis would withstand scrutiny by other scholars.

The bottom line is that it’s still pretty early in the game to be evaluating what effects the bailouts, the Fed interventions, and the stimulus actually had — particularly when, with regard to the stimulus, that involves simply re-running Keynesian models that predicted what the stimulus would do. I have some more thoughts on the great stimulus debate on the home page today.

Ryan Avent at Free Exchange at The Economist:

It should go without saying that the paper will be challenged; empirical work on such a matter is fraught with difficulties and heavily dependent on assumptions. And of course, economists haven’t managed to settle similar debates over policy choices made in the 1930s. But Mr Blinder and Mr Zandi point out that their estimates are in line with a number of other empirical efforts, including work by the Congressional Budget Office. The damage done by uncontrolled bank failures in the early 1930s provides a hint of what might have occurred if governments had allowed cascading failures among large financial institutions, and the national growth statistics give some sense of how much worse the output trajectory might have been absent stimulus. The big problem, for supporters of stimulus, is that the public doesn’t observe the 8 million jobs that would have been lost, according to the paper’s authors, without stimulus. But voters are very much aware of the 15 million workers who currently lack work. And they’re not happy about it.

Steve Benen:

Zandi, by the way, was an advisor on economic policy to the McCain/Palin presidential campaign.

The two looked at the totality of the federal response — TARP, stimulus, auto industry rescue, intervention from the Federal Reserve — and concluded that the collected efforts prevented an economic catastrophe.

“When all is said and done, the financial and fiscal policies will have cost taxpayers a substantial sum, but not nearly as much as most had feared and not nearly as much as if policy makers had not acted at all,” they write.

The economists didn’t measure what would have happened if policymakers had followed the right’s recommendations — no TARP, no auto industry rescue, and a five-year spending freeze — but the word “cataclysmic” comes to mind.

Indeed, the Zandi/Blinder paper concluded, “[I]t 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 [Federal Reserve Chairman] Ben Bernanke was probably right when he said that “We came very close in October [2008] to Depression 2.0.”


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