Wednesday, July 28, 2010

Grading Government Intervention in the Great Recession

The New York Times reported on a new paper by two leading economists, Alan Blinder and Mark Zandi, that used econometric modeling to demonstrate how government intervention helped stem a second Great Depression and kept us at a Great Recession.

The paper notes, "that without the Wall Street bailout, the bank, 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."

Immediately critics will point out that Blinder worked in the Clinton administration and Zandi is a registered Democrat. I would humbly suggest that party affiliation doesn't make someone's research automatically irrelevant.

And I'll note that i haven't read the whole paper, but will be in the next 24 hours to look at some of the assumptions and the models they used. I mean, I should use my bachelors degree for something, right?

Finally, I'll request that people looking to question the conclusions Blinder and Zandi reach base their criticism on the paper and its methodology, not just knee jerk rejection that a registered Democrat couldn't possible comment on the stimulus. Thanks.


Colin said...

I don't care that Zandi is a Democrat, but I do find it rather unsurprising that two stimulus cheerleaders authored a study which found the stimulus worked. These guys aren't exactly disinterested observers.

Because I have not yet read the paper I will not comment extensively, except to note that the fact that the paper relied on similar models to those used by the CBO doesn't impress me. The CBO models assume that putting taxpayer money into the system results in additional demand, spending, and jobs -- an assumption I do not share.

Plainly if you subscribe to that belief, and model accordingly, you can get some impressive figures given how much money was spent.

What would be far more useful, in my opinion, than running some Keynesian models which assume high multipliers would be actually going back and attempting to count jobs created and what occurred in the real world. Failing that, a comparison of what occurred to similar episodes which were addressed with different policy precriptions.

Jason said...

I don't think the CBO makes an unfair assumption. Taking the standard equation for GDP:

GDP = C + I + (X-M) + G

Currently, both C (personal consumption) and I (investment) are down relative to pre-recession levels. To maintain the same level of GDP as was experienced prior to the market failure, it's pretty straight forward that one would increase G (government expenditures).

It's reasonable to question what the multiplier effect has been for the most recent stimulus measures, but there has been no evidence that I have seen showing a crowding-out of private investment. Thus, it would be safe to assume at the very least we are at a multiplier of 1.

Colin, is there an economist that shares your belief that has model you'd like to reference as an alternative?

Colin said...

GDP = C + I + (X-M) + G

Well, yes, when government spends more GDP has to increase by definition, which is why I find it a problematic measurement of economic health as I mentioned here:

I do look at GDP per capita numbers because I can't think of a better proxy for cross-country comparisons, but for economic health I would prefer to look at unemployment. One example of the problems with GDP is that the rebuilding which takes place in response to a disaster (hurricane, 9/11, etc) actually boosts GDP, even though wealth has been destroyed. The Gulf oil spill for example will serve as a boost to GDP.

Colin, is there an economist that shares your belief that has model you'd like to reference as an alternative?

As the NYT article notes, John Taylor says his own research has found much less effectiveness from the stimulus. Taylor co-authored an opinion piece on the stimulus package's effectiveness here:

Robert Barro of Harvard has also said the stimulus achieved much less than advertised, and discusses his modeling here:

It's not the most in-depth discussion, however. You can additional insight into his thinking here: