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Wednesday, July 28, 2010

Bailouts, TARP, Stimulus Avert Depression, Say Blinder and Zandi

President Obama's pitch for his fellow Dems in November is that the economy would have been a lot worse if he and Congress hadn't taken action. That's not the easiest sell: it's a lot easier to convince voters on the basis of what did happen rather than what didn't happen.

Now economists Alan Blinder and Mark Zandi take a swing at proving what didn't happen thanks to the Obama Administration (and yes, the Bush Administration, in its last months) pouring on the bailouts, TARP, and stimulus. They find that in the alternative world where we would have followed the do-nothing approach of this year's Palin-Tea-Party panderers, we would have seen...
  1. Gross Domestic Product 6.5% lower this year;
  2. 8.5 million fewer jobs (on top of the 8 million lost in our reality);
  3. deflation instead of low inflation.
The Economist agrees that alternate-universe calculations don't persuade voters nearly as much as the fact that in this universe, they're still sending out résumés. And defenders of the faith on the other side will find tomatoes to throw at this analysis. But Blinder and Zandi paint a pretty grim picture of what could have been if we had let the economy crash without government taking the stick to engineer a softer landing.


  1. In my opinion, these people are correct. However, I also believe that the time for such strong medicine has passed. Now we need long-term "rehab," not short-term heroics.

    People are not spending money, so the economy remains sluggish. Corporations are not spending money and not hiring, so unemployment remains high.

    People are scared of what Kudlow on CNBC calls the "Washington tax attack." Corporations are hoarding cash with the goal of merely surviving what they fear could be a tax hike of historic proportions.

    Individuals and corporations alike have regressed into "fortress mode," not unlike the moods I recall in Miami during a hurricane watch.

    I, too, am holding onto my pennies. Therefore, any dreams of building an energy-independent "green home" are on indefinite hold. What good would a "green house" do me if I had to starve to death to pay for it?


  2. LOL re: "alternate-universe calculations don't persuade voters nearly as much as the fact that in this universe, they're still sending out résumés."

    Too true. The study is based squarely in the Keynesian camp and all the gov assistance has done is give some morphine to the economy.

  3. Sometimes you need morphine, and if a tax hike spurs reinvestment then it's a step forward. Government spending as a % of GNP is not much higher now than under Reagan: http://factcheck.org/Images/image/2010/Wire%20Items/Spending_GDP%283%29.png

  4. I'd say it was more than morphine. We didn't just hide the pain; we kept more pain from happening, like stopping the cancer from spreading.

    Stan, I want that deficit down, too, but there's a strong argument that when FDR and Congress did that in 1937, they prolonged the depression... and I really don't want to wait for a World War to bring production back to full strength. It's a tough bind. Cutting government spending may yet be the right thing to do, but we have to acknowledge that it would quite likely involve worse economic pain. Are you willing to pay that price for fiscal sanity?

  5. John, what sort of tax hike would spur reinvestment right now, and according to what principle would it work?

  6. Stan, I'm sure the article that Cory wrote about can say it better than I can, but basically if the tax structure makes it more advantageous to reinvest, business will do so, and we need government to do that too: http://www.salon.com/news/great_recession/index.html?story=/opinion/feature/2010/07/09/jobs_taxes_sirota

  7. Correlation does not logically imply causation.

  8. Indeed, Stan, but John's example (and the data therein) do show that higher marginal rates do not hold back economic growth. Correlation logically implies non-causation? And we also have the auxiliary goal of getting everyone to pay their fair share so we can beat down that deficit.

  9. When I say that correlation does not logically imply causation, I mean to say that the following statement is not always true: If we observe correlation between two phenomena, then one of the phenomena causes the other, or some external factor causes both." In other words, we have to allow for the possibility of sheer coincidence even when we see a strong correlation. I would also suggest that the correlation might not actually exist at all; any mathematician knows better than to try to prove a general theorem by example. California represents a massive economy with higher taxes than most of the rest of the states have, and they're one of the worst off. Massachusetts also has high taxes -- again, huge deficit. I am not so sure that high taxes have anything to do with prosperity. Or could prosperity cause a government to raise taxes, figuring that they might as well harvest some of the bounty?

    I can suggest two experiments, one of which I'd like to see done, and the other, not so much.

    (1) Ask some Brazilian economists, business people, and general citizens what, in their opinion, makes them go.

    (2) Let all the Bush tax cuts expire instantly on December 31, and see what happens to the economy in the ensuing months.

    Under Eisenhower we had vastly higher tax rates than we do now, and the economy did well and in fact improved consistently. But if we were to raise taxes to that level tomorrow, we should not expect that the economy would return to the state of affairs that prevailed then.

    I get a little disturbed when I see logic short-circuited to further a particular agenda -- and that would include conservative agendas as well as liberal ones or middling ones or theocratic ones or atheistic ones ... the most egregious of which may be the argument that certain religious people call "Creation Science" ... Aaaarghh!

    I submit that a strange gene, as yet unknown, causes both lung cancer and a propensity for people to crave cigarettes. I submit that electromagnetic radiation from power lines causes all of the increased cancer and heart disease rates we've seen in recent decades (such radiation essentially did not exist prior to 1900). I submit that maybe, instead, people's diets got richer in the late 1800s, which somehow led to increased ambitions and therefore increased construction of electrical power lines, but it was the richer diet, not the power lines and their attendant electromagnetic fields, that led to the cancers and cardiac conditions ... and on and on I could go, but by now you doubtless have had enough.

    We must demonstrably prove something, or at least have excellent reasons to suspect that it's true, before we call it a legitimate theory in any science based on logic, and all the more before we embark on some path that puts our livelihoods on the line for its sake. And I am not, not, not convinced that increasing taxes at this time will help the economy one iota.

    How about massive deficit spending? Can it bring about economic prosperity? Well, actually, in some cases it might -- as I said earlier, I agree that the "stimulus" spending by the former and current administrations likely prevented a depression -- but I would hardly suggest that we allow the current imbalance to continue indefinitely under the impression that the more we spend, the better off we'll all be. Else why not let the deficit balloon to 20 trillion, 50 trillion, 100 trillion, or a quadrillion dollars?

  10. Well put, Stan. The math example is particularly good: we prove nothing about triangles by pointing at a triangle and saying, "Look at that."

    On your two suggested experiments: I agree that #1 (asking smart Brazilians questions) would be a lower-risk experiment than #2 (letting Bush tax cuts end). However, would either of those experiements prove anything in the rigorous sense you're hoping for? Let's go right to #2: we try it, look up a year later, and find the economy has gone to heck. Or we look up on New Year's 2012 and find GDP booming, everyone working, etc. In either case, wouldn't we still be able to have the same conversation about correlation and causation? "Oh, the economic trend wasn't because of ending the tax cuts. They just coincided. The economy responded more to (Factor X, Y, Z...)."

    I agree, too, that raising taxes to 1950s levels does not guarantee a return to 1950s economic conditions. But the 1950s are a powerful counterexample to claims that high marginal rates would kill the economy. Back to math: you can't prove a theorem by pointing to a triangle, but you sure can disprove a proposed theorem by saying, "Oh yeah? Look at that one!"

    So we don't have a sure-fire theory to guide our policy choice. But we do have a shared concern about the deficit. We cannot sustain government on future money. We need to pay our way. I'm not saying we should never deficit-spend; I am saying that the closer we keep to a balanced budget, the more wiggle room we have to go into debt when we need to (recession, war...). We have two ways to do that: do less (economically dangerous at the moment, per Blinder and Zandi's analysis) or pay for more/all of what we do with taxes (politically dangerous and open to similar economic theorizing). Even if we eliminate the deficit through spending cuts, we still have several trillion of debt to pay off. So aren't we obliged to be responsible and raise taxes to pay the bills?

  11. Yes, Cory, I agree that we will at some point have to raise taxes to pay our bills, as well as cut spending.

    I would favor raising or eliminating the "wage cap" on social security taxes, increasing the top marginal tax rate, raising the retirement age to 70, and means testing for Social Security benefits.

    I really wish the Bush tax cuts had never taken place. I guess we can get addicted to low taxes just as easily as we can get addicted to high spending!

    I wouldn't hope for the real world to actually reach the level of perfection I witness daily in the mathematical world as I scribble out no less than five concurrent tomes (when I'm not ranting at you).


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