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August 4, 2010 in Opinion
Mark Zandi: Believe it or not, stimulus worked
No one is happy with the economy’s current performance. Granted, conditions are much better than they were not long ago: Remember the dark days of 2008, when major financial institutions were evaporating, layoffs were surging, and house and stock prices were plummeting? But with unemployment still stuck near 10 percent and household nest eggs significantly diminished, Americans remain understandably on edge.
Not surprising, many blame government’s response to the financial panic and recession for our current problems. Yet no one knows what the world would look like today if policymakers had not acted as they did.
It’s certainly not difficult to find fault with various aspects of the government’s response. Were bailouts for the banking and auto industries really necessary? Do extra unemployment insurance benefits discourage the unemployed from seeking work? Shouldn’t 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 government’s efforts to mitigate foreclosure as effective as they can be? The questions go on and on.
The government’s response also has been very expensive. Total direct costs – including the bailouts, the fiscal stimulus, and the mortgage-related losses of Fannie Mae and Freddie Mac – are expected to reach a whopping $1.4 trillion, equal to about 10 percent of gross domestic product. This explains the current year’s entire federal budget deficit.
Given where the economy is today, were these massive expenses worthwhile?
It’s a reasonable question, but the answer is a clear yes.
If government had not reacted as aggressively or as quickly as it did, the financial system would still be unsettled, the economy would still be shrinking, and the cost to U.S. taxpayers would be vastly higher. In sum, the government’s unprecedented response stabilized the financial system and ended the recession.
The most criticized part of the policy response was the bank bailouts, led by the Troubled Asset Relief Program. Congress at first voted to reject the program in October 2008, a decision that fueled the panic that was already roiling financial markets. Under pressure, lawmakers reversed their vote days later – just in time to prevent a catastrophe.
The TARP saved not only the nation’s major banks (and their shareholders and creditors), but also the broader economy. If more banks had been allowed to fail, many large U.S. companies would have followed, destroying many millions of jobs in the process.
As things have turned out, taxpayers will end up making money on the TARP. The banks have been quickly repaying the government with interest.
Critics have also objected to the fiscal stimulus as a case of government overreach and ineptitude. They could not be more wrong.
It is no coincidence that the recession ended when it did – about a year ago – just as the stimulus was providing its maximum economic benefit. Emergency unemployment insurance benefits and tax cuts put cash into Americans’ pockets that they have largely spent, supporting sales and employment. And without help from the federal government, state and local governments would have slashed payrolls and raised taxes at just the wrong time. (Even with the stimulus, state and local governments have been cutting, and they will cut much more.)
Stimulus infrastructure spending is now kicking into high gear, and it will be a significant source of jobs through at least this time next year. And business tax cuts have contributed to more investment and hiring.
Setting the record straight on the stimulus question is important because it will shape the current debate about how government should manage the still-fragile economic recovery. Last week, partly because of the misconception that the stimulus didn’t work, Congress was barely able to muster enough votes to pass another extension of emergency unemployment benefits. Not doing so would have been a serious error, putting the recovery in jeopardy.
The mistaken view that the stimulus failed also threatens to short-circuit federal assistance to hard-pressed state governments. That, too, would be a mistake.
Yes, the economy is still struggling, but not because the policy response failed. Our troubles persist, rather, because the problems at the root of the financial panic and the Great Recession ran so deep.
There have been missteps for sure, but government has served us well. We must not lose sight of that now, because the economy still needs help.
Mark Zandi is chief economist of Moody’s Analytics. He wrote this for the Philadelphia Inquirer.
Editorial: Workers’ beer routine undermines public trust 
liarsinnews on August 04 at 8:04 a.m.
Stimulus worked? And in your next breath you say “no one knows”. Which is it? Prove it!! You can`t anymore than I can. I think the reckless stimulus money spending, IMHO was a waste of taxpayer money. I look at the fat cats who after receiving stimulus money spent it on their bonus checks which fly’s in the face of the spend thrifts who passed out the loot.
Scoutster on August 04 at 8:30 a.m.
Bad news for Obama haters. But, let’s remember TARP passed with both sides and W in office.
Zandi was McCain’s economic adviser in the campaign.
Stimulus worked, for what it did, folks. Admit it and celebrate with some tea.
toobright on August 04 at 8:54 a.m.
“Yet no one knows what the world would look like today if policymakers had not acted as they did.”
After this statement, how can you go on with the rest of the article? Mind-boggling.
“The TARP saved not only the nation’s major banks (and their shareholders and creditors), but also the broader economy. If more banks had been allowed to fail, many large U.S. companies would have followed, destroying many millions of jobs in the process.”
This is complete B.S. in the highest odor. The key word here is “major”. There are hundreds of other, smaller banks that were chomping at the bit to take over for these “major”, inept banking institutions.
horse_feathers on August 04 at 9:50 a.m.
TARP just delayed temporarily the failure of the economy at a very high cost. The unemployment rate and the deficit is the evidence that this is an artificial slowing of the recession.
The key word here is “LIARS” and we are fools if we continue to believe this administration.
gonzomo on August 04 at 10:28 a.m.
This is total fiction. All the TARP did was federally subsidize major banks and drive us deeper into the poorhouse. Sen McCain just released a report on the waste in the “stimulus” bill. I’m not sure how these projects help the economy. Renovating buildings that are closed to the public? Cocaine for Monkeys? It’s all crap.
schleufer on August 04 at 10:55 a.m.
eric cantor was one of many republicans that said its a waste of money and it isnt working then got caught on camera back home taking credit for stimilus money projects. i believe his was a rail project. then back to washington to sell the public more BS.
boehner kept saying the republican plan would have cost half as much and would create twice as many jobs. wow dont that make it 4 times as good? if his idea was so great why wasnt it put into play when bush was in office? my opinion is a good part of the reason its taking longer to recover is because the republicans are dragging thier feet and still pushing the same agenda that got us into this mess in the first place.
i dont know about every one else but my 401k has nearly doubled since obama took office.
gmorton on August 04 at 7:43 p.m.
“As things have turned out, taxpayers will end up making money on the TARP. The banks have been quickly repaying the government with interest.”
Er, no. It may make money on the funds lent to private banks, most of which has already been repaid, but it will lose big on the handouts to Fannie and Freddie, $145 billion to date, probably $350 billion in the long run, not a penny of which has been repaid or ever will be. And those free lunch purveyors will go on their merry way, underwriting mortgages to unqualified borrowers, so that pols can boast that they’ve made housing “affordable” to the poor.