The Broader Market

By Jordan Eizenga

Alan Blinder, Princeton economist and former fed vice-chairman, and Mark Zandi, chief economist at Moody’s Analytics, will release a report today that evaluates the federal government’s response to the financial crisis.  Advanced excerpts of the report illustrate that the report assesses both fiscal and monetary policy and notes that the both the stimulus and the Fed’s quantitative easing activities have had substantial impacts.  A preview posted by the New York Times Economix blog reads:

We find that the effects on real GDP, jobs, and inflation are huge, probably averting what would have been called Great Depression 2.0. For example, we estimate that, without the policy responses, GDP in 2010 would be about 6½% lower, payroll employment would be about 8½ million jobs lower, and the nation would now be experiencing deflation.

When we divide these effects into two components, one attributable to the various rounds of fiscal stimulus and the other attributable to the panoply of financial-market policies (including the TARP, the bank stress tests, and the Fed’s quantitative easing), we estimate that the latter are substantially more powerful than the former. Nonetheless, our estimated effects of the fiscal stimulus policies alone are very substantial: In 2010, real GDP that is about 2% higher, an unemployment rate that is about 1½ points lower, and almost 2.7 million more jobs….

None of this is to suggest that the initial stimulus was of sufficient size.  It does, however, invalidate the notion that stimulus spending is in any way a cause of high rates of unemployment or crowding out of private investment.  The federal government’s fiscal and monetary policy responses have clearly averted disaster.