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Zandi: Financial rescue and stimulus responsible for saving or creating 8.5 million jobs


Here's your big thought of the day: George W. Bush and Barack Obama did a pretty good job stabilizing the economy and kickstarting recovery after the financial crisis began. That, at least, is the conclusion of a paper (pdf) written by Moody's chief economist Mark Zandi and Princeton's Alan Blinder. They estimate that without the financial interventions and the stimulus, "GDP in 2010 would be about 6½% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation." I spoke to mark Zandi this afternoon. An edited transcript of our conversation follows.

Ezra Klein: This paper is heavily based on the model you use for economic forecasting. But these models have come under some criticism: Some say that they’re just abstract equations and you can get whatever answer you want by tweaking the numbers. So what is this thing? Who uses it?

Mark Zandi: I developed the model almost 20 years ago. I’m an economic consultant. I’ve got clients in many large, private-sector institutions. And we provide macroeconomic forecasts for them. In more recent years, the model has expanded out. We’ve been doing a lot of scenario analysis. The model has been used by banks to stress test themselves. Bank of America, JP Morgan, SunTrust and others used it to run scenarios on their solvency under different conditions. The business community has come to the realization that the economy matters a lot, and they’re using it to figure out how to account for macroeconomic changes in their own budgeting and planning.

And what are its component parts?

Broadly speaking, there’s a demand side and a supply side. On the demand side, there’s consumer spending, business investment, trade, government spending. Changes in demand are very important for short-term movement in the economy. On the supply side, there’s growth, business stock, demographic trends like immigration and household formation, productivity in the labor supply, and more. The supply side is particularly in the longer-run.

The link between the demand and supply side runs through prices and wages and other costs. If demand falls relative to the economy’s potential, you have rising unemployment and lower utilization. Fiscal and monetary policy plays a key role in trying to mitigate recessions. I’ve gone back to every recession and depression and looked at the policy efforts to address the downturn and try to at least capture the different ways in which policymakers have tried to generate a recovery. And what we’ve done in the Great Recession, some of it is unique, but most of it has been done many times before. Tax cuts, emergency unemployment benefits, aid to state government, these are things we’ve done every single time.

Your paper, based on a model using those historical inputs, says that our response this time has been basically, if not totally, successful.

Any individual aspect could’ve been a failure, or not very effective. But the totality was successful. It ended the recession much sooner than otherwise would’ve been the case and it forestalled a much larger decline in our output. And at the end of the day, it saved taxpayers money. it would’ve cost us a lot more if we had not responded.

Your results suggest that the financial rescue was, if anything, even more significant than the stimulus. It’s since become wildly unpopular, but you’re saying that George W. Bush and Hank Paulson deserve some credit for the policies they created in the immediate response to the crisis.

Absolutely! I think TARP was incredibly important. The mistake was for Congress to vote it down initially. That eviscerated confidence and took the equity market down to a whole other level and exacerbated our problems. By that time, the damage was so serious that the intent of TARP had to shift. Originally, it was about buying bad assets, which would’ve been more graceful. But because of the no vote and the damage it did, they had to make TARP a source of capital for the financial system. The capital purchase program was ultimately the one key thing that was necessary for stabilizing the financial system and the economy.

But it’s also been horribly unpopular, as people feel that the bankers got a free ride. The stimulus is also unpopular. People look at the economy and wonder how 10 percent unemployment can possibly be considered a success.

That’s why I wrote this paper. I think there’s a very significant misconception with regard to TARP and the stimulus, and I wouldn’t have written the paper if I didn’t worry it could have significant policy consequences next time we go through a major recession. Our future responses will be fashioned by how well we perceive how we did during this period. I firmly believe it’s a mistake to say stimulus was not effective.

What are the downside lessons of the response to the crisis? What didn’t we do well?

Before I answer that question, it’s hard to be critical because these things had to be done very quickly, and to gain support to get them done, some things were added into the mix that you would not have done if you were king. One mistake was conflating the near-term stimulus with an infrastructure plan. The infrastructure part was not really stimulus. That’s different than saying whether it’s good or bad policy. The funding for the National Institute of Health, for instance, gets people’s focus, even though it’s pretty minor in terms of the dollars and cents involved. But conflating the two things scrambled the meaning of stimulus in people’s minds.

There were also some marketing mistakes. The original forecast was just a bad forecast. The unemployment rate was already at 8 percent by the time stimulus passed. We just didn’t know it because the data lags. What really matters is what the unemployment rate would’ve been if we didn’t do stimulus, and in my view, it would clearly have been higher.

If the response to the crisis was effective, then why do we seem to have stalled out in recent months? Since May, the recovery has been lagging, hiring hasn’t been very strong, and there’s a general sense that the economic momentum we saw earlier in the year has dissipated a bit.

My view is that the recovery is fragile. Businesses are still very nervous. They have a lot of cash. Their profits are up. But they’re not willing to invest it right now. There’s a lot of speculation as to why. I think policy uncertainty has to be playing a role. And don’t forget, a lot of these companies were near death 18 months ago, and senior managers don’t forget that easily.

Let me ask you about policy uncertainty. I’ve had trouble understanding this case. If the economy was fine and we’d passed the health care and financial reform laws, it’s hard for me to believe we’d be having a major unemployment problem. Conversely, if the economy was exactly where it is but we hadn’t passed those laws, would things really be that different?

I think there’s a great deal of uncertainty with respect to the rules of business and the cost. Health care, regulatory reform, cap-and-trade, immigration policy, and tax policy. Each of those debates have enormous implications for how a business operates and whether they invest and expand. Business people won’t cut payrolls because of it, but they’ll be slow to hire. They just can’t plan. So I think we had to do financial regulation and at the end of the day it addressed some important issues, but it does throw into question some of the rules of the game, and so the banks are trying to figure things out. And they’re also waiting for the regulations from Basel III. So they don’t know how much capital they’ll need. For a bank, that’s their business, so they won’t lend while they’re still figuring it out.

So what do we do now?

The dynamic that’s key to expansion is not fully engaged. In a normal recession, if the unemployment rate was peaking at 7 percent, I’d say no worries, no need for more stimulus. But I’m nervous in the context of 9.5 percent unemployment when you have a zero percent interest rate and a huge deficit. If we’re all wrong and we go into recession, we’ve got no policy response. The Federal Reserve isn’t very effective at this point. Our budget deficit will balloon. So I think it’s prudent to err on the side of doing too much rather than too little. And we can do that. We’re not Greece or the U.K. or Germany. We have a 3 percent 10-year Treasury yield. We have always solved our fiscal problems and the world has faith we will solve our future ones. So we have the resources.

By Ezra Klein  |  July 28, 2010; 5:23 PM ET
Categories:  Economic Policy , Economy , Interviews  
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a blog post at The Economist mag:

"...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. ..."

and who is Arnold Kling at that was quoted in the comment section?

Posted by: jeeze56 | July 28, 2010 5:54 PM | Report abuse

"There were also some marketing mistakes. The original forecast was just a bad forecast. The unemployment rate was already at 8 percent by the time stimulus passed."

Informative interview. About the only part sticks out is that part. Back in late 2008-early 2009, people were talking about the impending Great Depression II. Bank nationalization rumors were being bandied about and the stock market, well, it crashed. Credit tightened. Foreclosures were rising. And after all this, policymakers didn't think that unemployment would be _much worse_ than it was in the early 1980's? Seriously...

Posted by: tuber | July 28, 2010 5:58 PM | Report abuse

@jeeze56, Arnold Kling is a conservative economist, my sense is that he's a serious guy with an honest perspective and a good resume/background

He blogs at econlog

Posted by: bdballard | July 28, 2010 6:17 PM | Report abuse

I think this study amounts to quite a bit of self-fulfilling hand waving. Arnold Klein handles why very well here:

@ jeeze56 and @bdballard -Klein is a libertarian, not a conservative by the way. He was a progressive and keynesian for much of his career, and was even the research assistant for Alan Blinder and worked on this very model, which is what he discussed in the above link.

Alan Reynolds also has a good treatment of this bad study here:

Posted by: WilliamFreeland | July 28, 2010 6:24 PM | Report abuse

"Some say that they’re just abstract equations and you can get whatever answer you want by tweaking the numbers."

Ezra, I don't think most serious critics believe Zandi is tweaking the model to make the government look effective. In my view models of this nature require a lot of assumptions, and if you use Keynesian assumptions you get Keynesian results. The Keynesian assumptions remain debatable.

Posted by: justin84 | July 28, 2010 7:02 PM | Report abuse

For example, I'll bet Zandi assumed monetary policy would be of little importance in the model - constrained at the lower bound by a zero fed funds rate, but also constrained in the sense that circumstances would prevent any monetary policy tightening.

If you assume the Fed is unable to react, that's an important assumption. I know of at least one economist who would place a lot of importance on the central bank reaction function.

Another potential issue is that we really can't say with any confidence how fiscal policy impacts the economy without seeing the counterfactual.

Take food stamps. These are seen as highly stimulative. The money gets spent quickly. Okay, so grocery stores get more money. But are grocery stores going to increase hiring because of food stamps? Well, probably not. What about wholesalers? Will more people take up farming? Certainly there would be a lesser contraction in spending than without food stamps. But grocery stores are already in a recession resistant sector. And most businesses can handle some fluctuations in demand without needing to constantly add or remove employees. If a grocery store has 365 customers one day and 390 the next, the staffing requirements don't really change - perhaps just longer waits at the checkout line at certain parts of the day.

Of course, now the money will be in the hands of various businesses who can in turn spend more. But now we're just at the level of tax cuts.

All this needs to be offset against the alternative use of funds - an alternative use to which we can only guess.

This isn't to say we shouldn't spend on food stamps. I just don't think it is obvious they have huge multiplier effects.

Posted by: justin84 | July 28, 2010 7:13 PM | Report abuse

Moody's, the same company that rated junk securities as triple A leading investors worldwide to buy worthless CDOs and MBS leading to the financial meltdown of 2008.

Posted by: JRM2 | July 28, 2010 7:19 PM | Report abuse

This sort of one-sided analysis that is all about the benefit and nothing about the cost, is worthless.

Posted by: slantedview | July 28, 2010 7:36 PM | Report abuse

How's that housing bubble you thought was just fine working out for you, Mr. Zandi? You just can't miss macro calls that badly and have any credibility left in my book.

Posted by: mrnegative | July 28, 2010 8:12 PM | Report abuse

I guess since Gruber disgraced himself, Zandi is Klein's go to substitute for blank assertions tarted up with opaque models.

Posted by: msoja | July 28, 2010 8:19 PM | Report abuse

Alan Reynolds writing at the DailyCaller rips Blinder and Zandi, too.

If the model could predict anything, why was Zandi so upbeat about housing in January2008? And why was he likewise so upbeat about the jobs alleged created by President Obama’s stimulus bill in January 2009? In reality, no macroeconomic model has proven more accurate than judgmental guesswork even for short-term forecasting. Attempting to use such models to predict the effects of higher tax rates or larger transfer payments has been considered disreputable since 1976, when University of Chicago Nobel Laureate Robert Lucas penned his famous “Lucas critique” of the whole idea.
//end cite’s-keynesian-black-box/

In other words, it's just more stupid Klein propaganda.

Posted by: msoja | July 28, 2010 8:39 PM | Report abuse

This is an illuminating interview, and I congratulate Mark Zandi for doing this study. But it only makes me more frustrated at the utterly inept job by the White House on getting out the positive case on everything they have done for the economy. As a prime example, I have repeatedly heard Republicans and others slam the Recovery Act because it was supposed to prevent unemployment from going over 8% while it is now almost 10%, without once hearing the point that Mark Zandi makes here -- that unemployment was already at 8% when the Recovery Act was passed but we didn't know it because of the lag in data. It's such a simple fact, but it utterly rebuts the silly Republican talking point. Unfortunately, like "death panels" and other myths, it is almost impossible to correct this misconception about the Recovery Act at the point in time.

For some unknown reason, the same pr gurus who were brilliant during the Obama campaign have been completely inept at making simple points to correct the outrageous misconceptions -- mostly spread by the Tea Party and their Republican supporters -- about TARP, the Recovery Act, the auto rescues, etc. Unfortunately, as Zandi points out, the unpopularity of these actions makes bold action in future crises even more unlikely.

I continue, however, to have faith in Obama himself and his good judgment. I only hope he will surround himself with others who more effectively defend his achievements.

Posted by: juliecon | July 28, 2010 11:05 PM | Report abuse

How we ended the great American Democracy, Independence and Main Street Capitalism with Totalitarian World Bankster Globalization...

Explain to the American victims Mr. Blinder and Mr. Zandi How indentured debt is wealth?

Posted by: 1windcatcher | July 29, 2010 12:02 AM | Report abuse

How we ended the great American Democracy, Independence and Main Street Capitalism with Totalitarian World Bankster Globalization...

Explain to the American victims Mr. Blinder and Mr. Zandi How indentured debt is wealth?

Posted by: 1windcatcher | July 29, 2010 12:03 AM | Report abuse

Wasn't this guy McCain's economic advisor during the campaign?

Posted by: SnowleopardNZ | July 29, 2010 12:21 AM | Report abuse

So McCain's former economic adviser is calling for more stimulus. Are the conservatives out there reading this?

Posted by: SnowleopardNZ | July 29, 2010 12:27 AM | Report abuse

Nice inexplicable attacks on Zandi from the Caller and its zombie legion.

Zandi in 2006:

"Neither forecasting approach offers much reassurance for homeowners. Zandi says that housing prices will decline in 2007, which would be the "first decline in national house prices since the Great Depression." He adds that the catalyst for the unwinding of the housing boom is higher interest rates and that the unraveling of some of the markets is due to high speculation and short-term investors, or flippers with the objective of purchasing and then quickly selling those homes.

Zandi in 2007:
In a CNN money article titled "Housing Market Outlook for 2008 is Bleak", an article based entirely on Zandi's projections:
"The housing slump will have a substantial impact on the overall economy, according to Moody's, which says it will depress real gross domestic product by more than a percentage point this year and by 1.5 percentage points in 2008.
Speculative investment in the mid-2000s helped fuel the current slump. Zandi pointed out that 16 percent of mortgage originations during 2005 were for non-owner-occupied housing, twice the number of a few years earlier.
"And that's a very conservative estimate of investor demand," he said. "Many home buyers lied on their mortgage applications." That's because interest rates are lower for owner/occupied dwellings."

Zandi in spring 2008:
"Zandi: House prices will fall another 10% on top of the close to 15% they have already fallen from their peak in the 2006 spring selling season. This assumes more cuts in construction, a modest recession and more federal government help.
Investing in real estate
USA TODAY: Is now a good time to buy homes for investment purposes?
Murphy: Now is the perfect time to buy homes for investment purposes. Rates are low, so more house for the money and great deals. What happened in the Miami area is it got oversaturated by those building more condos than there was demand for. We all felt it was untouchable, and with the amount of people moving into Dade County alone, it would sustain. Clearly, not the case.
Brandt: Now is a great time to buy investment property — in some markets.
Zandi: Not unless you have a very long horizon (10 or more years). Investors will have a much better opportunity in the 2009 spring selling season."

Posted by: eggnogfool | July 29, 2010 9:03 AM | Report abuse

Finally, the Zandi blurb from January, 2008 that the Daily Caller refers to:
"Analysts also expect the housing slump to bottom out in the middle of next year, as steep price discounts and better mortgage availability lure consumers back into the market. “Home-building can only go so low; house prices only need to fall so far until housing affordability is restored,” Mr. Zandi said. “The write-downs in the financial system will have occurred. Some of the problems that are weighing on psychology and activity will have been washed out of the economy by midyear.”"

Yes, Zandi was very 'upbeat' that home prices would turn around by midyear. MIDYEAR OF 2009. LERN 2 REDE PLS.
As Zandi projected, the overall market did bottom out around mid year of 2009 (though local markets bottomed at different times), the bank system write downs were mostly over, home prices didn't fall forever, etc.

Posted by: eggnogfool | July 29, 2010 9:05 AM | Report abuse

"As a prime example, I have repeatedly heard Republicans and others slam the Recovery Act because it was supposed to prevent unemployment from going over 8% while it is now almost 10%, without once hearing the point that Mark Zandi makes here -- that unemployment was already at 8% when the Recovery Act was passed but we didn't know it because of the lag in data. It's such a simple fact, but it utterly rebuts the silly Republican talking point."

Ezra notes that "this paper is heavily based on the model [Zandi] use[s] for economic forecasting."

I'm not sure the best pro-stimulus talking point here is that economic forecasting models failed to get the correct unemployment value for the first couple of months, and that's why unemployment is higher than projected without the stimulus - these same economic forecasting models are what you are using to show the stimulus worked.

Why on Earth should anyone trust the results of a forecast model when the forecast itself was bad right out of the gate?

In the fall of 2009 unemployment hit 10.1%. Per the pro-stimulus chart made in late winter of 2009, unemployment was expected to be about 7.9% with the stimulus in the fall of 2009.

I understand economic forecasting is really difficult (I don't think you actually can accurately forecast the economy most of the time, although one can get lucky from time to time). However, don't tell me your forecasting model shows government policy X did Y if your model's forecast of macrovariables six months out (or for that matter for the first month) was a huge miss.

Posted by: justin84 | July 29, 2010 10:00 AM | Report abuse

"Are the conservatives out there reading this?"

Yes. I suspect they think Zandi's models are about as reliable as Zandi's forecasts.

If you think McCain is conservative then I suppose you'll think John Taylor is as well. A reaction.

Shorter Taylor: Zandi builds a model to support his forecast.

Admission or blade? Keynesians have two choices. Admission they have no idea what they're talking about and have been horribly wrong from the beginning or perceived honor.

Frankly. I vote for them to live.

Posted by: wtfci | July 29, 2010 10:30 AM | Report abuse

I would like to ask The Great Zandi the prognosticator, if it is going to rain tomorrow....I have a picnic planned.

Posted by: inowat | July 29, 2010 10:40 AM | Report abuse

Ezra I want to see a rebuttal when Deflation kicks in, you know this is BS so does Moody's, I'll be waiting ???

Posted by: dwenzel2 | July 29, 2010 1:17 PM | Report abuse


The Moody's unemployment projections for the "with stimulus" option from back then have almost perfectly pegged the real* unemployment rate each month for 18 months now.

The reality is that people who put their money on the line (Wall Street, etc.) use Keynesian models like Zandi's. They aren't magic, but they do a very good job.

The critics' models don't work at all, so they claim that prediction is impossible, but we should follow their policy prescription anyway.

*Removing the effect of allowing 99 weeks of unemployment benefits instead of the usual 26.

Posted by: eggnogfool | July 29, 2010 3:40 PM | Report abuse

Hooray, we create 8.5 million jobs by taking 391 billion out of the economy... how many jobs did we destroy in the process?

What's the net, not the gross.

When you find that number, and realize it's negative; feel free to pretend that doesn't exist.

They did report the other interesting negative though. $391 billion spent in stimulus spending resulting in $340 billion in GDP... didn't Biden promise us a 1.5 or 2 multiplier instead of the < 1 multiplier those evil conservatives said would happen? Is .87 more or less than 1?

Posted by: gekkobear1 | August 4, 2010 2:17 AM | Report abuse

Doesn't get any better than this for pwnage-level rebuttal:

It's sad to see an unknown blogger totally destroy a well known mainstream mediot.

Posted by: TheLastBrainLeft | August 4, 2010 8:59 AM | Report abuse

Whooo Hoooooooooo

we is crank n out the LSD now


Posted by: donabernathy | August 4, 2010 9:00 AM | Report abuse

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