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Froma Harrop
Froma Harrop
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Washington Saved Our Economic Hide

Comment

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 polices 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.

To find out more about Froma Harrop, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

COPYRIGHT 2010 THE PROVIDENCE JOURNAL CO.

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Comments

7 Comments | Post Comment
"Using econometric models, Alan Blinder and Mark Zandi argue that..."

Econometric models? You mean using mathematics to understand people like they are atoms and planets?

Econometrics was an attempt to insert techniques of physical sciences to make economics look "scientific", so that calculus formulas would somehow explain human behaviour. We know how successful econometric models are, because Black, Scholes, and Merton pioneered some of the major work on it. When they were asked to start a hedge fund that implemented their mathematical techniques, the result was Long Term Capital Management, the most spectacular failure ever known.

Economists come up with these bogus models all the time. They seem elegant and shiny, but economists never have to get the money back on their forecasts, unlike salesmen, managers, and employees. The latter are paid for output, and the former for input,
Comment: #1
Posted by: Prateek Sanjay
Thu Aug 19, 2010 2:26 AM
No offense, Froma, but Blinder and Zandi are highly educated, well paid, Keynesian idiots. Keynesians refuse to die even though they have been shown repeatedly by rational historical analysis to have never done anything but extend the course of recovery from every recession. Command economies do not work. You are wrong on virtually every subject. You were wrong about health care. You are wrong about government intervention in economies. You're an educated idiot. You, Blinder and Zandi could start a club.
Comment: #2
Posted by: Dawn Brockman
Thu Aug 19, 2010 11:59 AM
No offense, Dawn but I will call you an educated idiot too.

I see you already belong to a club-Tea party

Gee I feel better already!

typical rants.
Comment: #3
Posted by: Gary Guthmueller
Fri Aug 20, 2010 8:03 AM
And what are you Gary? A useful idiot? Work done by Hayek in the 1940's and Friedman in the 1960's is far more up to date that Keynes and Galbraith. Oddly Keynes ideas remain popular with government bureaucrats. Why? because the idea that spending money to manage a recovery means maintaining federal power. Just because someone has Tea Party ties does not make them wrong or stupid. Be more careful tossing the "I" word around.
Comment: #4
Posted by: Cliff Bullock
Mon Aug 23, 2010 11:48 AM
Where exactly did Froma Harrop get her degree in macro-economics?
Comment: #5
Posted by: Cliff Bullock
Mon Aug 23, 2010 11:50 AM
This one line describes all liberal thought..."Happily, government stepped in, and America bucked a catastrophe." The catastrophe that was bucked was the catastrophe caused by this same government. Fannie and Freddie are GSE's that created the mess, assisted by federal regulation to lend to the unfit, worsened by credit default swaps on those bad notes, blindly ignored by those in government who are now throwing more of citizen's money around to pay for the mess they created. Dodd, Frank, Bush, Obama, et. al. are complicit in all of this. So, if it weren't for the government making banks lend to the unqualified in the first place, they wouldn't have had to "step in." They should butt the hell out.
Comment: #6
Posted by: Chris Fahy
Mon Aug 23, 2010 12:26 PM
Those who argue against the steps Bush/Obama took to "save" us from disaster have legitimate gripes. But I don't think it's legitimate to claim unemployment wouldn't have been worse. After talking to a few tea party acquaintances, they preferred all out depression, hopefully short and sharp, to bailouts. I think, if I'm not misunderstanding, that they preferred that because they believe it would have fixed the deficit (disagreeing with the Zandi model) and we would have eliminated a lot of govt spending, which in principle was more important than the temporary suffering of millions. (Perhaps they think the churches would have fed everyone-doubtful) They didn't buy the possible trauma of not being able to access their cash in the bank, not a given, but certainly possible. McCain didn't have the stomach to take that path either, although he probably would have done a smaller stimulus in the form of tax cuts. Does everyone one know 1/2 the stimulus was tax cuts, a GOP idea? Common sense tells me job loss would have been MUCH higher if the auto industry failed, and states weren't propped up by fed funds. Does that justify the bailouts? That's not as clear but history will tell. Bottom line, Reaganomics/Keynesianism is a failure.
Comment: #7
Posted by: deb
Mon Aug 23, 2010 2:41 PM
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