Blinder/ Zandi (Part 1) Economists Say the Intervention Helped – But How Much?

The economic world is abuzz with news of a new paper by Alan Blinder and Mark Zandi estimating the effect of the economic policies of the last few years. The NYT's Sewell Chan reported:

“In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration's fiscal stimulus program, the nation's gross domestic product would be about 6.5 percent lower this year. In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation. The paper, by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody's Analytics, represents a first stab at comprehensively estimating the effects of the economic policy responses of the last few years.”

Their overall conclusion is that the combination of policy responses was highly effective: "When we divide these effects into two components—one attributable to the fiscal stimulus and the other attributable to financial-market policies such as the TARP, the bank stress tests and the Fed’s quantitative easing—we estimate that the latter was substantially more powerful than the former." However, Blinder and Zandi also find that the TARP stabilization measures combined with the Fed’s actions actually had a greater impact than the Obama stimulus spending. This will come as unwelcome news to officials in the Obama Administration who are currently trying to persuade the public that the stimulus spending did more good than harm by adding dramatically to the deficit. Especially when the TARP program has largely been repaid, as planned.

Sewel reports, “If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.”

In contrast however, leading economist John Taylor was reportedly unconvinced when told of the findings. “I’m very surprised that they find these big impacts,” said John B. Taylor, a Stanford professor and a senior fellow at the Hoover Institution. “It doesn’t correspond at all to my empirical work.” Taylor argued that the Fed’s purchase of $1.25 trillion in mortgage-backed securities has not been effective and that the Administration’s stimulus spending has also had little impact.

This disagreement highlights the continuing struggle economists and analysts have had estimating the true effects of the stimulus measures taken over the last few years. As we discuss here, estimating those effects is crucial as debate continues to rage over implementing even more spending in the form of a second stimulus.

Of course, we will look for the paper to be challenged in coming weeks as estimates and studies on such matters are heavily dependent on assumptions, and are therefore ripe for debate. Already, Arnold Kling leads the pack in questioning Blinder and Zandi's methodology here.  However, the Blinder and Zandi estimates are in the ballpark of other studies being conducted, including work done by the Congressional Budget Office.

Unfortunately for the Administration, regardless of the true effectiveness of the stimulus package, Americans are still feeling the effects of high unemployment. Although the measures may have saved some jobs, with five people currently unemployed for every job available, that’s little comfort to many right now.