Government prevented a Great Depression?

Moody’s Analytics published a study on July 27 by Alan S. Blinder, Gordon S. Rentschler Memorial Professor of Economics, Princeton University, and Mark Zandi, Chief Economist, Moody’s Analytics, which concluded that the combination of the fiscal stimulus enacted at the beginning of 2009, the 2008 Troubled Asset Relief Program (“TARP”) bailout of the financial institutions, the bank stress tests (and the capital fixes ordered pursuant to them), and the Fed’s quantitative easing prevented what they say “could have been called Great Depression 2.0.”

The paper, “How the Great Recession Was Brought to an End,” says that without the combination of these measures “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” (p1). They conclude that the financial institution props were more important than the stimulus in achieving this result. Nevertheless, as for the various stimulus programs (including tax rebates mailed to lower-and middle- income households in 2008, the American Restoration and Recovery Act (ARRA”) in 2009, and several other measures through early 2010 — totally about $1 trillion or about 7% of GDP) they find: “The stimulus has done what it was supposed to do: end the Great Recession and spur recovery. We do not believe it a coincidence that the turn-around from recession to recovery occurred last summer, just as the ARRA was providing its maximum economic benefit.” (p2.)

Addressing the vocal criticisms of these measures, they say that despite popular impression the TARP program was a success and will probably only cost about $100 billion with the financial institution part of it turning a profit. They argue that the ARRA was successful as far as it went. “What matters for economic growth is the pace of stimulus spending, which surged from nothing at the start of 2009 to over $100 billion (over $400 billion at an annual rate) in the second quarter. That is a big change in a short period, and it is one major reason why the Great Recession ended and recovery began last summer.” As for the criticism that it failed to keep unemployment as low as the White House predicted, they respond that most private forecasters (including Moody’s Analytics) misjudged how serious the downturn was and the error shows that the stimulus package should have been larger, rather than smaller (p4).

These conclusions are drawn from a wealth of data. Perhaps the most interesting is contained in Table 11 on page 16. Using Moody’s Analytic’s data, they estimate the one-year “bang for the buck” from federal spending. The biggest bang (defined as the estimated dollar change in GDP for given dollar in federal spending) came from the temporary increase in Food Stamps ($1.74), temporary federal financing of work-share programs ($1.69), extending unemployment insurance spending ($1.61), increased infrastructure spending ($1.57) and general aid to state governments ($1.41). Tax cuts were net losers in terms of bang for the buck. One dollar in lost government income resulted in the following increases in GDP: Bush tax cuts, 0.32; dividend and capital gains tax cuts, 0.37, cut in corporate tax rate, 0.32. In other words, the tax cuts extracted by the Republicans in formulating a “bipartisan bill” (one in which they did not vote for) resulted in the private pocketing of money at great expense to the GDP. This kind of public policy is what the Whigs in the eighteenth century called “new corruption.”

The conclusions of this report are flatly contradictory to the entire economic program of the Republic Party and the ideology of the teabaggers. Given that the GOP and the right wing of this country are impervious to empirical analysis (in fact, they repudiate it as a matter of ideology), the report will undoubtedly have no impact on public opinion. And given the ossified nature of our political and economic systems, we can only expect that the good will the government enjoyed after the 2008 election has largely played out. Nevertheless, there is some small comfort in knowing that the limited actions taken during the brief window when government intervention was allowed produced some of the results we hoped for.

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