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Study argues stimulus, other action averted second Great Depression; others disagree

Did President Obama's $787 billion stimulus and other aggressive federal policies avert a second Great Depression?

A big study out Wednesday says so, but some other economists disagree.

According to Moody's chief economist Mark Zandi and Princeton economist Alan Blinder, the suite of emergency solutions put forth by the Bush and Obama administrations combined to stave off a serious downturn.

"Eighteen months ago, the global financial system was on the brink of collapse and the U.S. was suffering its worst economic downturn since the 1930s," Blinder and Zandi said in their report. "The Great Recession gave way to recovery as quickly as it did largely because of the unprecedented responses by monetary and fiscal policymakers."

Zandi and Blinder take a look at two key economic indicators -- gross domestic product and unemployment. With the stimulus and other programs, 2009 GDP declined 2.4 percent. Without it, they argue, it would have dropped 7.4 percent.

With the relief programs, unemployment has (thus far) peaked at 10.1 percent in October. Without them, the economists argue, unemployment would have peaked at 16.5 percent and under-employment (part-time workers and discouraged people who have given up looking for work) could have hit 25 percent.

So, what should we think about any of this?

First off, we didn't have a Second Great Depression. And it's impossible to prove that we would have had a Second Great Depression without the stimulus programs, or that we wouldn't have had one without the stimulus programs. It's like the debate on the Patriot Act and all the measures the former administration took after the Sept. 11, 2001, terrorist attacks. There has not been another successful terrorist attack on U.S. soil since then, but is that because of everything the Bush administration did? Or not? There's no way to know.

Same with this new study. There's no way to kn ow for sure if all the budget-busting moves enacted by both administrations prevented a second Great Depression.

I am reminded of a forecast written by former Bush economic adviser Edward Lazear in January 2009, just before Bush left office, that said the U.S. economy would turn positive in the second half of 2009. This was before Obama's $787 billion stimulus, before the cash-for-clunkers program, before the home-buyer subsidies and so on. "These forecasts assumed no stimulus," Lazear later wrote. "The projected turnaround was instead based on the natural rebound of the economy that would come after the financial crisis had eased."

Again, though, there's no way to know if Lazear was right, because the next administration did launch all those stimulus programs. But you get my point.

Zandi and Blinder acknowledge this in their study:

"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. Were the bank and auto industry bailouts really necessary? Do extra [unemployment] benefits encourage the unemployed not to seek work? Should not bloated state and local governments be forced to cut wasteful budgets? Was the housing tax credit a giveaway to buyers who would have bought homes anyway? Are the foreclosure mitigation efforts the best that could have been done? The questions go on and on."

However, they continue: "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."

It is on this point that disagreement rises.

Critics say Zandi and Blinder are do not fully comprehend or appreciate the long-term impact of all the subsidies on the national debt. On CBNC.com, contributor Andrew Busch, director of global currency at BMO Financial Group and a free-marketeer, writes:

"The better analysis would've extended the thought to: What are the costs and what are the benefits of these programs? Also, what would've been the costs and benefits of a supply side program? This is what is maddening to anyone in the markets. It's like we're all accepting the 'Keynesian' belief that government can effectively counterweight the shortfall in private sector demand with no downside."

Zandi and Blinder's report is sure to provoke numerous reactions from both sides because it is, at its heart, a powerful political document. Faced with near-double-digit unemployment and a growing concern about the deficit and the nation's debt, Democrats are under a lot of pressure to keep control of Congress in the November elections.

Even though some of the economic rescue programs, such as TARP, were launched by the Bush administration, Democrats will doubtless point to their stimulus programs and this study and say, "See? We saved the economy!"

Whether voters buy that, we'll find out in November.

By Frank Ahrens  |  July 28, 2010; 3:47 PM ET
Categories:  U.S. Economy  
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Comments

I guess the TEA party, and other TARP harpies, wanted a complete economic collapse. They're so wrong on so many things.

Posted by: thebobbob | July 28, 2010 4:39 PM | Report abuse

To a large degree the arguments about the results of the stimulus package are just blowing in the wind. Without a series of experiments that repeat exactly the same set of conditions without the stimulus and with a variety of different stimulus packages, it is impossible to make any kind of objective assessment of how well it did or did not work. Moreover, much of the question about the effect of these packages is a function of time. Government policies in 2003 did get us out of a downturn and bring back jobs. But those policies laid the foundation for the disaster we experienced in 2008 and left us with an economy that has continued to deteriorate over the last decade.
The reality of the fall of 2008 was that substantial parts of the financial system stopped working because major markets like mortgage backed securities just disappeared and because banks were afraid to lend each other even short term money. Had that situation been simply ignored, a large part of the still healthy economy would have stopped working. No even marginly responsible government could ignore that situation. The response did get the financial system working again. Beyond that it is difficult to grade it objectively. But, given human reality and the pressures of hard time deadlines, it would be very surprising if it was anywhere near perfect.

Posted by: dnjake | July 28, 2010 5:49 PM | Report abuse

It's far too early to conclude that we've avoided the Second Great Depression. There are still 5.5 people looking for work for each job available. There's been some recovery. There was a bounce in 1931, too, after the 1929 crash. But in real dollars, the DJIA didn't recover until 1959, thirty years and a world war later.

It takes decades to recover from a housing bubble. Japan's housing bubble burst in 1989, and not only did housing prices never recover over twenty years, neither did stocks or GDP. It's going to be decades before the US comes back.

Posted by: Anonymous | July 29, 2010 12:44 AM | Report abuse

This is why they call economics "the dismal science".

One thing is for sure...the last time we ran the tight-money, supply-side experiment (1929) we saw the results. Bernanke, Paulson, Geither, Bush and Obama did precisely the opposite and it seems to have worked, so far.

Posted by: hoos3014 | July 29, 2010 2:12 PM | Report abuse

Who knows. Ok,we finally applied the Keynesian policy, stimulate and not save, so yes we got something that is in the direction of what we wanted.

However, I think the Keynes response is not well understood. Keynes mentioned that it is better to spend then to put money under the mattress. I think too many people take this as a cute metaphor for something, no, folks really put money under their bed, ie, not spend not do anything with it which, of course, reduced money cycling through the economy. This is not as true now, (or if it is, it is the gold bugs) People put money in banks where it can do as much, maybe more good in the way of investment. Money does not sit around doing nothing.

The other thing that confuses me is that we are using stimulus as a antidote to ... stimulus. All we've been doing all aloing is stiumuating, heck the mortgage deduction is a stimulus. It just seems contradictory that more of the same would solve its problems.

Posted by: Anonymous | July 29, 2010 5:53 PM | Report abuse

I guess the TEA party, and other TARP harpies, wanted a complete economic collapse. They're so wrong on so many things.

+++++++++++++++++++++++++++++++++++++

Nothing wrong with TARP when it been paid back to the Government!

Now the issue is, why isn't Obama paying it back toward the Debt, that it was used against!

Posted by: theaz | July 30, 2010 5:07 PM | Report abuse

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