Early Empirical Signs the US Avoided a Depression

An article published in today’s New York Times suggests that the stimulus packages enacted by the US in 2008 and 2009 may have helped avoid a Depression. This is the first such evidence to suggest that stimulus spending has been incrementally positive to the economy and, even more importantly, could have prevented an even more catastrophic unemployment rate.

The article reads:

In a new paper [by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics], 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.

There have been a number of harsh critics who have said the stimulus was a waste of money, but I feel they are missing the business mindset behind the analysis: The costs associated with preventing further losses are probably much less than the total value of unchecked losses themselves. For example, the costs of the stimulus checks was probably lower than the potential economic losses if the US hadn’t issued the checks. This paper is aiming to show precisely that correlation.

“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.

(snip…)

“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.