This week, Princeton's Alan Blinder, a former vice chairman of the Federal Reserve, and Mark Zandi, chief economist at Moody's Analytics and a onetime adviser to John McCain's presidential campaign, released a paper laying out in simple and compelling terms how the government saved the country from another Great Depression. Using a standard econometric model, they backed out everything the government did to tame the financial crisis and stimulate the economy -- the zero interest rates and extraordinary lending by the Fed, the bailouts of the banks and the auto companies, the takeover of Fannie Mae and Freddie Mac, the tax cuts and the infrastructure payments and the money for the states. And what they concluded is that, without these actions, the economy would now be 8 percent smaller, with 8 million fewer jobs and a federal budget deficit this year of $2 trillion rather than $1.4 trillion.
The irony is that this set of bold government initiatives that saved the country from economic catastrophe remain as unpopular today as when they were introduced.
Now I've written before about how the economic crisis, dubbed the Great Recession, isn't all its cracked up to be. I've also written about how the myth that government doesn't create jobs needs to die. Yet here we are still slaved to the idea that if only businesses were free to do what they wanted, they would hire, and the economy would recover.
Its a nice theory, but it doesn't hold water. Yes, GM and Chrysler are adding new employees, thanks to government bailouts. But with the Chevy Volt set to debut at $41,000 one has to wonder if they have really learned anything. To say nothing of the fact that, nearly two years into the supposed recovery:
One would have hoped that, by this point in the recovery, businesses would have begun to use some of that cash to ramp up spending on research and development and to invest in new plants and equipment. But after falling sharply for two years, such spending has only just begun to rebound, and much of it has focused on faster-growing markets outside the United States. Some of the cash has been used to pay down debt or buy back stock. But so far the one thing businesses haven't done is hire back full-time employees, preferring instead to contract for temporary workers or increase the hours of the workers they already have.
The failure of the unemployment rate to back off from ts 9 to 10% "precipice" is not a failure of the White House's economic policy. Its conscious decison by business large and small (but mostly large) to hold profits for short term gain rather then make long term investments. Call me nuts, but didn't that behavior get us into this mess in the first place?