Quantifying the government’s rescue of the economy

QUANTIFYING THE GOVERNMENT’S RESCUE OF THE ECONOMY…. In politics, perceptions arguably matter more than anything, and when it comes to the federal government intervening to rescue the economy, the perceptions are less than kind.

If polls are any indication, the efforts launched by federal officials in 2008 and 2009, when the economy was teetering on the brink of wholesale collapse, were unacceptable. The financial industry bailout seems to be universally reviled, and last year’s Recovery Act is only marginally more popular. (In fact, in many instances, the public thinks both efforts are the same thing.)

President Obama and Democrats routinely, if not explicitly, argue to voters that “it would have been worse.” But is there way to prove that empirically? Two respected economists gave it a shot.

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.

“While the effectiveness of any individual element certainly can be debated, there is little doubt that in total, the policy response was highly effective,” they write.

Zandi, by the way, was an advisor on economic policy to the McCain/Palin presidential campaign.

The two looked at the totality of the federal response — TARP, stimulus, auto industry rescue, intervention from the Federal Reserve — and concluded that the collected efforts prevented an economic catastrophe.

“When all is said and done, the financial and fiscal policies will have cost taxpayers a substantial sum, but not nearly as much as most had feared and not nearly as much as if policy makers had not acted at all,” they write.

The economists didn’t measure what would have happened if policymakers had followed the right’s recommendations — no TARP, no auto industry rescue, and a five-year spending freeze — but the word “cataclysmic” comes to mind.

Indeed, the Zandi/Blinder paper concluded, “[I]t 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. We conclude that [Federal Reserve Chairman] Ben Bernanke was probably right when he said that “We came very close in October [2008] to Depression 2.0.”