How much worse could it have been?
Critics of the $787-billion stimulus package that Democrats pushed through Congress in early 2009 frequently point out how much worse the economy has fared since then than the Obama administration predicted when it proposed the legislation. For example, they cite a report by two top administration advisers that predicted unemployment would hit 9% if Congress did nothing but that the stimulus package would keep it below 8%. In fact, unemployment soared above 10% after Congress passed the American Recovery and Reinvestment Act, and it's still about 9.5%. Ergo, the Recovery Act made things worse, not better.
It's fair to debate the Keynesian assumptions that underlie ARRA, but it's not fair to say it's a failure just because the economic realities were worse than the projections. That's because projections are guesses. The real question is whether we're better off than we would have been without the extra spending. That's hard to quantify, but economists Alan Blinder of Princeton University (and formerly of the Clinton administration and the Federal Reserve) and Mark Zandi of Moody's Analytics (who advised John McCain's presidential campaign) try to do so in a study released Wednesday titled "How the Great Recession Was Brought to an End." Their conclusion: The country would have been significantly worse off without the stimulus measures passed by Congress in the past two years, and it would have been in truly desperate straits today had Congress and the Fed not taken extraordinary steps to save the financial markets as well.
The report is likely to be trotted out repeatedly on the campaign trail ...
The fact that Blinder and Zandi are both Keynesians will no doubt undermine their results in the minds of some conservatives. In particular, the economic models by Moody's that Blinder and Zandi rely on show federal spending having a "multiplier effect" (e.g., $1 in unemployment benefits generating $1.61 in economic activity) that critics such as Harvard's N. Gregory Mankiw dispute.
Having said that, it still seems to me that Blinder and Zandi have offered a powerful defense for what the Bush and Obama administrations (and Ben Bernanke's Fed) did to help the economy, including more than $1 trillion worth of stimulative tax cuts and spending increases. Here are a few nuggets of data from their study:
- Had Washington done nothing, unemployment would have reached 16.5%, compared to the actual peak of 10.1%, with almost twice as many job losses as there have been. The gross domestic product would have continued to drop through 2010, instead of growing nearly 3%. And the federal deficit would have peaked at $2.6 trillion this fiscal year, instead of $1.4 trillion.
- The biggest impact came from the Wall Street bailout (a.k.a. the Troubled Asset Relief Program) and the Fed's effort to ease the credit crunch. With the TARP and the Fed's efforts but no stimulus, Blinder and Zandi say, GDP would have grown about 1% this year, unemployment would have reached nearly 12% by 2011, and the deficit would have been $1.6 trillion in fiscal 2010.
- With just the $1 trillion worth of stimulus, Blinder and Zandi estimated, GDP would have grown only slightly this year, unemployment would have peaked at 13%, and the federal deficit would have been $1.75 trillion in fiscal 2010. Still, their analysis asserts that the stimulus spending produced a lower deficit than the federal government would have been left with had it done nothing to rescue the economy. Under their model, a laissez faire response by Washington would have yielded a deep and prolonged recession, slashing federal revenues. The resulting deficit would have been larger than the one caused by the stimulus measures.
- The cumulative impact of the Wall Street bailout and the stimulus measures was greater than the sum of their parts because "the policies tend to reinforce each other," the report states.
"When all is said and done," Blinder and Zandi conclude, "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 policymakers had not acted at all. If the comprehensive policy responses saved the economy from another depression, as we estimate, they were well worth their cost."
It's a safe bet that other economists will produce different models soon that support a much different conclusion about what might have happened had Washington done nothing, or had Senate Majority Leader Harry Reid (D-Nev.) not found the necessary GOP votes to pass ARRA. There's just no way to know for sure how bad things would have gotten had Washington not intervened because, well, it did.
-- Jon HealeyCredit: AP Photo / Pablo Martinez Monsivais