Clarence the angel has a tough job in “It’s a Wonderful Life.” He must show the suicidal George Bailey what terrible things would have happened had he not been born. Two prominent economists are playing Clarence to the multitudes who believe that forceful government intervention during the financial meltdown should never have been.
Using econometric models, Alan Blinder and Mark Zandi argue that the bailouts, the stimulus and other extraordinary actions saved America from nothing less than another Great Depression. Blinder was vice chairman of the Federal Reserve. Zandi is chief economist at Moody’s Analytics and advised Republican presidential candidate John McCain.
Had Washington not taken any aggressive steps starting in 2008, the results would have been horrific, their study says. Real gross domestic product would have fallen a “stunning” 12 percent, rather than the actual decline of 4 percent. Nearly 17 million jobs would have vanished, twice as many as the real count. And the unemployment rate would have peaked at 16.5 percent.
The campaign trail is not a welcoming place for careful analysis. Tea party favorites routinely bash their opponents (often fellow Republicans) for having supported the stimulus and various government rescues.
In Arizona, Republican Senate candidate J.D. Hayworth pounds incumbent McCain for having supported the $700 billion bank bailout, known as the Troubled Asset Relief Program. In Texas, Republican Sen. Kay Bailey Hutchison lost a primary race for governor, many say, because she voted for TARP.
Rep. Roy Blunt, a Missouri Republican running for the Senate, refers to the $800 billion program to revive the economy as “the now-failed stimulus.” In Florida, Republican candidate for the U.S. Senate, Marco Rubio, jabs Republican-turned-independent Gov. Charlie Crist for backing a stimulus that “has failed to keep unemployment from soaring.”
Such contenders often cite Barack Obama’s projection (they use the word “promise”) that unemployment would level off at 8.5 percent once Congress passed his stimulus plan. With joblessness now at 9.5 percent, Obama clearly underestimated the challenge, but that’s still a whole lot better than 16.5 percent.
Ignoring what might have happened had the government not launched a vigorous response may be irresponsible, but it can be good politics. That’s because many Americans – seeing the weak job picture and forgetting their own terror during the early days of the economic freefall – can be convinced that such policies were ineffective and possibly counterproductive.
They remind me of family members who, four weeks after a quadruple bypass, want to know why Grandpa isn’t dancing. At least the family knows that the operation was needed.
One number the public does see and understandably dislikes is the federal budget deficit. Most assume that TARP and the various recession-fighting programs helped raise the deficit to $1.4 trillion in fiscal 2010. But how many have considered what that number might have been with no policy response? Blinder and Zandi have.
Recessions themselves fuel deficits by raising social spending and lowering tax revenues. Thus, government programs that make economic downturns shallower and end them sooner can pay for themselves.
If Washington had not reacted as quickly and as forcefully as it did, the two economists write, “the costs to U.S. taxpayers would have been vastly greater.”
With no special government intervention, the 2010 deficit would have passed $2 trillion, according to their model. It would have reached $2.6 trillion in fiscal 2011 and $2.25 trillion in 2012.
Add outright deflation to the expected massive unemployment and falling GDP, Blinder and Zandi conclude, and “this dark scenario constitutes a 1930s-like depression.”
Happily, government stepped in, and America bucked a catastrophe. How fortunate for us all that the tea party wasn’t running Washington.
Subscribe to the Morning Review newsletter
Get the day’s top headlines delivered to your inbox every morning by subscribing to our newsletter.