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Did Stimulus Funding Help or Hurt U.S. Economy in the Long Run?

A new study by economists Mark Zandi and Alan Blinder showed the U.S. government's nearly $800 billion economic stimulus and the Wall Street bailout likely steered the American economy away from another depression. Jeffrey Brown moderates a debate between Zandi and Stanford University economist John Taylor.

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    And we turn to the continuing debate over the impact of the stimulus and other programs to help the economy in the past and, perhaps, once again.

    The latest economic data showed again just how tough the road to recovery is. First-time claims for jobless benefits dipped a bit, but not by enough to suggest the overall unemployment rate is falling. And the private firm RealtyTrac reported home foreclosures in the first half of the year were up in three-quarters of the largest metropolitan areas.

    Faced with those facts, President Obama today stressed his summerlong mantra: The numbers are not what he wants, but, without the federal stimulus he championed, they would be much worse.


    Because of what we did, America as a whole is in a different place today. Our economy is growing, instead of shrinking. Our private sector's been adding jobs for six straight months, instead of losing them.


    And a new report released yesterday may help the president make that case. Economists Mark Zandi and Alan Blinder said the stimulus of nearly $800 billion, plus the Wall Street bailout, known as TARP, and other measures, likely warded off an outright depression.

    The study found that, without those programs, the gross domestic product would be 6.5 percent lower, eight million more people would be unemployed, and prices would be falling as deflation set in.

    But such benefits also come with high costs. Last week, the White House projected a deficit of nearly $1.48 trillion for this fiscal year. That's down slightly from an earlier estimate, but still amounts to 10 percent of the nation's total economic output.

    Republicans continue to charge that all that spending is doing little to help the economy. And they warn of tax hikes to come.

    North Carolina's Virginia Foxx spoke on the House floor today.


    $6.1 trillion, that's how much money the federal government has spent in just the first 18 months of the Obama presidency. Washington is spending $7 million every minute of every hour of every day.

    There's only one way to feed that kind of destructive habit. Washington needs more of your tax dollars. And that's exactly what Democrats here on Capitol Hill and in the White House are talking about.


    In the meantime, Federal Reserve Chairman Ben Bernanke has said some stimulus outlays are still necessary. But recent polls show public support for stimulus spending and its potential to revive the economy has waned.

    We join this debate now with Mark Zandi, co-author of the newly-released paper and chief economist at Moody's Analytics, and John Taylor, economics professor at Stanford University and senior fellow at the Hoover Institution. He was undersecretary of the treasury in the George W. Bush administration.

    Mark Zandi, it's a pretty big claim that government action prevented another depression. Give us the outline of the argument for that.

    MARK ZANDI, chief economist, Well, I'm not arguing that any individual aspect of the policy response was good or bad. I mean, I think we can debate that for a long time to come, and we will.

    But I think, if you take the totality of the response, what the Federal Reserve did, what the Bush administration, what the Obama administration have done, what Congress have done, it's that totality that has brought an end to the great recession and jump-started an economic recovery.


    John Taylor, the totality led us out or prevented another depression — what do you see?

    JOHN TAYLOR, senior fellow, Hoover Institution: I don't think there's any evidence for that.

    You look at the totality, which — which I have been doing for several years now, looking at each program and then adding them up, and I find a very small effect. In fact, to some extent, some of the early actions, I think, were damaging. Some of the — some of the actions taken, actually, I think, led to some of the panics that we saw.

    So, no, I just don't think there's any evidence. When you look at the numbers, when you see what happened, when people reacted to the stimulus, it did very little good.


    Well, Mark Zandi, I mean we can get into economic models here, and it will get into the weeds quick, but help — give us an example. I mean, give us something concrete that allows us to see what impact — an impact.


    OK. Well, let's take the Recovery Act, the fiscal stimulus that is much criticized.

    The maximum benefit of that fiscal stimulus, through the tax cuts of the stimulus and through the spending increases, hit their apex last summer, in June, July and August of last summer. And that is precisely when the recession ended. It's the exact, precise timing. So, that, I think, is some evidence — at least, it is very suggestive — that the stimulus, the Recovery Act, was very important to bringing an end to the great recession.


    Well, John Taylor, what do you see coming from that stimulus?


    When you look at the specific things that were done — so, sending checks to people to jump-start consumption — you look at the checks sent out, and you don't see consumption jump-starting or moving. In other words, it didn't have the effect that it was advertised to have.

    And I see the recovery starting earlier. Quite frankly, the panic in the fall of 2008 was behind us by December/January. And, also, I would say the recovery that we have had — and, unfortunately, it's now fizzling, largely due to business investment. In fact, that recovery is investment, not government purchases.

    And now the slowdown is because investment has slowed down, and people are getting nervous about the increased debt that has partly resulted from the stimulus.


    So, just to stay with you, so we understand, I mean, if none of this had been — none of these under — interventions by government had been undertaken, where would we be now. Are you arguing we would be better off?


    Well, quite frankly, yes, because some of the early interventions made things worse. The — in fact, the — I go back to the ultimate cause of this crisis, and that was the period where the Fed intervened and kept interest rates too low, led to the housing boom, and then the bust, and the toxic assets, and the trouble in the financial institutions.

    But you don't even have to go back that far. You can just look at the response in 2008, where we had an on-again/off-again bailout policy, in helping the creditors of Bear Stearns, not helping the creditors Lehman, back with AIG, then off again. That spooked the markets and I think you could say had a negative effect.

    Plus, we have this legacy of debt right now, which is unfortunately holding the economy back and people are worried about tax increases.


    Well, Mark Zandi, respond to that.


    Well, I wouldn't disagree with John that — that the uneven treatment of the creditors of financial institutions, beginning with Bear Stearns, and then Fannie Mae and Freddie Mac, and, of course, everyone knows Lehman Brothers, was the proximate cause for taking what was a significant financial crisis, but generating a financial panic.

    Everyone lost faith. So, I would be very sympathetic to that argument, and I think he's correct.

    Our analysis, the analysis that Dr. Blinder and I conducted, began after the panic hit, after we were in the middle of turmoil and the financial system was on a precipice of a collapse. And we asked the question, well, if policy-makers had not responded by providing equity to the banking system, if policy-makers had not responded by conducting bank stress tests, if the FDIC had not stepped in and guaranteed bank debt issuance, if the FDIC had not raised deposit insurance limits to restore confidence, if we had not the — all the — a plethora of tax cuts and spending increases that were all the various aspects of stimulus, then we what be in a measurably worse place.

    But John is right; there were a number of policy mistakes that got us into this mess, but we would still be in a very significant mess if not for the aggressive policy response…


    All right. So, here we have the two of you, prominent economists, looking at this, and providing very, very different pictures.

    Now, Mark Zandi, let me start with you on this. Why does it matter? Why did you look back?




    And why does it matter to us now in terms of where we are now?


    It is vital, because if we don't get a better understanding of what we went through and how we responded in excess — success of that, we can't make good policy going forward.

    We can't have a reasonable debate about whether we should extend emergency unemployment insurance benefits. We can't have a debate, a good debate, about, should we give more help to these hard-pressed state governments?

    I mean, if John is saying that those things didn't matter, then we're not going do those things, and I would consider that to be inappropriate policy in the context of where we are today. So, this is a very important discussion that we need to get some clarity around.


    Well, is that what you are saying, Professor Taylor?


    It certainly is vital, and it is important. And, of course, the conclusion that I come to — and — and there is difference of opinion. I think people should recognize the difference of opinion.

    What I come to is that these have not had an impact, and now, moreover, we're in a situation where the debt has gotten so high, that we need to address that. And people are worried about these tax increases. Everyone agrees that increasing taxes is not going to help the economy. Yet, that is what we are faced right now.

    The best stimulus, I think, would be to forego any tax increases for at least the next few years.


    To you — just to stay with you, so the argument that there is — that is out there, of course, is whether we need another shot of spending. You think the deficit overrides that?


    I certainly do, especially if you agree with me that the spending increases just didn't do very much. The economy recovered as business investment has recovered. Now the economy is slowing down as business investment is flagging, based, I think, on this uncertainty about policy, the regulatory and taxes in particular.


    And, Mark Zandi, how do you factor into the stimulus vs., of course, the worry about the deficit?


    Well, I think John is right. I wouldn't allow those tax increases to take hold on January 1 either. I think economy's still too fragile for that.

    But I would say — and I — and I agree with John that our fiscal problems are very serious, and we need to address them. But we're not going to address our fiscal problems unless this economy is off and running, unless the recovery evolves into a self-sustaining economic expansion. And we're not there yet.

    And given that we have a 9.5 percent unemployment rate, if we go back into recession, it's going to be very painful, very difficult. There will be no policy response. So, we should err — prudent risk management would say we should err on the side of doing a little too much here, rather than too little, to make sure that we are off and running, so that we can really address our fiscal problems.


    All right, and, John Taylor, just a brief last word from you, bringing you back to your Washington days. We're having an economics debate here, but is this going to be determined more by politics?


    I think the elections are very important here.

    You mentioned at the beginning about the polls indicating people don't think this worked. They're very worried about the deficit. I think politicians are beginning to hear that, and hopefully will make their decisions based on it.


    All right, John Taylor, Mark Zandi, thank you both very much.


    Thank you


    Thank you.