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Study: Stimulus Stopped Recession from Becoming Depression

August 9, 2010

Source: Economic Policy Institute

With unemployment nearing 10 percent and weak economic growth, critics of Congress and the Obama administration have attacked the federal government’s efforts to rescue the economy at the start of the current recession as a failure.

But a new report by Princeton University professor Alan Blinder and Mark Zandi, chief economist at Moody’s Analytics and one time adviser to John McCain, find that the federal government’s actions in 2008 and 2009 to stimulate the economy and prevent a financial meltdown essentially prevented a new Great Depression, saving over eight million jobs.

The report, How the Great Recession Was Brought to An End, says that without federal intervention, unemployment would have likely reached near 16 percent.

These federal initiatives include the bailout of the auto companies, the Troubled Asset Relief Program – which injected needed capital into struggling banks – and the 2009 Recovery Act, a $787 billion stimulus package that funded major construction and infrastructure projects.

Says Andrea Orr from the Economic Policy Institute:

It can be easy to overlook the enormous economic progress that has been made since early 2009, when monthly job losses averaged almost 750,000 and GDP was severely contracting … [This] report shows that absent these actions, the country would have 8.5 million fewer jobs and economic output would be $1.5 trillion lower.

Federal efforts to bail out the economy have come under increasing fire from some policy makers for adding to the national deficit, but the authors conclude that an even wider collapse of the economy would have added more than half a trillion dollars in debt.

While … these questions deserve careful consideration, it 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 Ben Bernanke was probably right when he said that ‘we came very close in October [2008] to Depression 2.0.”

However the argument is not just one for the historical record, say Blinder and Zandi.

The debate over these policies is crucial because, with the economy still weak, more government support may be needed.

To read the whole report, click here.

Home page photo used under a Creative Commons License from Flickr user Steve Rhodes.