Zandi, Blinder: Government Saved the Economy

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Wednesday, July 28, 2010 at 11:06 am

In a new paper released today, entitled “How the Great Recession Was Brought to an End,” prominent economists Alan Blinder and Mark Zandi say that the stimulus, stress tests, emergency Federal Reserve maneuvers and Troubled Asset Relief Program saved the economy from collapse.

Without those extraordinary measures, they say, the United States’ GDP would be 6.5 percent lower, the unemployment rate would be 3 percentage points higher, there would be 8.5 million fewer jobs and the economy would be experiencing deflation. Blinder is a professor at Princeton and a former Fed official. Zandi is the chief economist at Moody’s Analytics and a former adviser to Sen. John McCain’s (R-Ariz.) presidential campaign.

The economists also note that the stimulus — the $787 billion American Reinvestment and Recovery Act — had less impact and proved less important than the government’s monetary policy and financial-market stabilization measures, like the Fed buy-up of mortgage-backed securities.

Zandi and Blinder write:

It is understandable that the still-fragile economy and the massive budget deficits have fueled criticism of the government’s response. 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. It is also not difficult to find fault with isolated aspects of the policy response. [...]

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 [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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Comment posted July 28, 2010 @ 9:10 pm

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