In Study, 2 Economists Say Intervention Helped Avert a 2nd Depression

WASHINGTON — Like a mantra, officials from both the Bush and Obama administrations have trumpeted how the government’s sweeping interventions to prop up the economy since 2008 helped avert a second Depression.

Now, two leading economists wielding complex quantitative models say that assertion can be empirically proved.

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.

Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.

By comparison, the savings and loan crisis cost about $350 billion in today’s dollars: $275 billion in direct cost and an additional $75 billion from the recession of 1990-91 — or about 6 percent of G.D.P. at the time.

But the new analysis might not be of immediate solace to officials in the Obama administration, who have been trying to promote the “summer of recovery” at events across the nation in the face of polls indicating persistent doubts about the impact of the $787 billion stimulus program.

For one thing, Mr. Blinder and Mr. Zandi find that the financial stabilization measures — the Troubled Asset Relief Program, as the bailout is known, along with the bank stress tests and the Fed’s actions — have had a relatively greater impact than the stimulus program.

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.

The combined effects of both sets of policies cannot be directly compared with the sum of each in isolation, they found, “because the policies tend to reinforce each other.”

Told about the findings, another leading economist was unconvinced.

“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.”

Mr. Taylor said the Fed had successfully stabilized the commercial paper and money markets, but he argued that its purchases of $1.25 trillion in mortgage-backed securities have not been effective. And he said the Obama administration’s stimulus program has had “very little impact and not much to show for it except a legacy of higher debt.”

The disagreement underscored the extent to which econometric estimates are heavily reliant on underlying assumptions and models, but Mr. Blinder and Mr. Zandi said they hoped their analysis would withstand scrutiny by other scholars.

“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. Read more at www.nytimes.com

Obama asks Senate to pass bill on ad disclosure

WASHINGTON | Mon Jul 26, 2010 4:32pm EDT WASHINGTON (Reuters) - President Barack Obama on Monday urged the Senate to approve legislation that would reveal who is behind election campaign advertising, and chided Republicans for opposing a measure he said would protect American democracy.

The Senate is due to vote on Tuesday on a bill that would blunt a Supreme Court ruling allowing unlimited campaign spending, against which Obama has been an outspoken critic.

“You’d think that reducing corporate, and even foreign influence over our elections would not be a partisan issue,” Obama said in Rose Garden remarks at the White House.

“But of course this is Washington in 2010, and the Republican leadership in the Senate is once again using every tactic and every maneuver they can to prevent the Disclose Act from even coming for an up or down vote,” he said.

The bill would force the disclosure of the sources of election advertising spending and ban financing from companies with more than 20 percent foreign ownership.

Republicans say it is designed to protect Democrats worried about their chances in the November 2 congressional elections.

“The Disclose Act seeks to protect unpopular Democrat politicians by silencing their critics,” Republican Senate leader Mitch McConnell said.

The January Supreme Court ruling overturned long-standing campaign finance limits and will allow companies to spend freely in elections. It is expected to unleash a wave of money before the November poll and the 2012 presidential race.

Obama said disclosing who is behind an election ad would serve an important role in policing campaign finance.

“A group can hide behind a name like ‘Citizens for a Better Future,’ even if the more accurate name ought be ‘Companies for Weaker Oversight,” he said. “These shadow groups are already forming and building warchests of tens of millions of dollars to influence the fall elections.” Read more at www.reuters.com