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Notes from a diehard

Alan Blinder, writing in the WSJ, argues that the economy is in much better shape than it was when Barack Obama came into office:

Of course, that does not prove that the president’s policies caused the unexpected improvement. Maybe our luck just turned, and the economy would have done even better under a laissez-faire approach. (A few diehards still argue that FDR’s policies worsened the Great Depression!)

Here is Jonathan Bean, summarizing Robert Whaples survey of economists and historians:

In 1995, economic historian Robert Whaples published a survey in the Journal of Economic History asking “Where Is There Consensus Among American Economic Historians?” (Vol. 55, March 1995). Half of the economists and more than a quarter of historians agreed, in whole or in part, that the New Deal prolonged the Great Depression.

Why are people so loath to give Obama credit for the improvement in the economy? Blinder answers:

Specifically, I would point to three policy landmarks, two of which were and remain terribly unpopular—and which probably account for the negative polling results.

The first was the much-maligned Troubled Asset Relief Program (TARP), which Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson persuaded Congress to pass on Oct. 3, 2008. TARP must be among the most reviled and misunderstood programs in the history of the republic. Voters are clearly appalled by the idea that their government spent $700 billion bailing out banks.

The only problem is: It didn’t. Even if we count insurance giant AIG as a bank, no more than $300 billion ever went to banks. TARP’s total disbursements, including the auto bailout, never reached the $400 billion mark. The money went for loans and to purchase preferred stock; it was not “spent.” In fact, most of it has already been paid back—with interest and capital gains. When TARP’s books are eventually closed, the net cost to the taxpayer will probably be under $100 billion—far under if General Motors ever repays.

Spending perhaps $50 billion of taxpayer money to forestall a financial cataclysm seems like a bargain. Yes, I know it’s maddening to hand over even a nickel to bankers who don’t deserve it. But doing so was a necessary evil to save the economy. Think of it as collateral damage in a successful war against financial armageddon.

Hmmm. Only $50 billion? We’ll see if that ends up being the case. But either way, Blinder ignores the incentive effects the bailouts will have on future risk-taking. Those costs are zero in Blinder’s calculus. He also ignores the Fannie and Freddie bailout. It’s not part of the TARP but it’s part of the reason people are mad at Obama. The latest CBO estimate of the cost of taking over Fannie and Freddie is $390 billion. (For those of you who enjoy black humor, here is a story from July 2008 when CBO estimated the cost of rescue of Fannie and Freddie might be as much as $25 billion, though there was a 50% chance that the costs would be zero.)

Blinder continues:

The second landmark was the fiscal stimulus package that President Obama signed into law about four weeks into his presidency. Originally priced at $787 billion, it was later re-estimated by the Congressional Budget Office (CBO) to cost $862 billion. A huge waste of money, say the critics—even though most independent appraisals, including that of the CBO, credit the stimulus with saving or creating two million to three million new jobs.

As I have pointed out before, the CBO appraisal was nothing of the sort but merely a restatement of their earlier forecast. But for Blinder, the logic is inescapable:

Try to imagine any government spending a massive sum like $862 billion without creating or saving millions of jobs. More specifically, suppose peak-year spending from the stimulus bill was about $300 billion—which is roughly correct—and that our hapless government just sprinkled its purchases around at random. On average, each job in our economy accounts for about $100,000 worth of GDP. (We are a highly productive bunch!) So $300 billion worth of additional GDP should be the product of about three million more jobs. Do we really believe the stimulus produced only a small fraction of that—or none at all?

I understand the appeal of Keynesian economics. But is it really economics to assume that everything else in the economy is unchanged when government spends $862 billion? Are there no imaginable offsetting effects? Is it not possible that increasing the deamnd for labor affects its price and its quantity?

Blinder also  lauds the Federal Reserve stress tests conducted on banks and concludes:

So the next time you see Chairman Bernanke, congratulate him for threading the needle. And the next time you see members of the House and Senate who voted for TARP and the stimulus package, give them a hug and say thank you for taking two monumentally tough votes that helped keep us from falling into the abyss.

We’ll see. I’m not sure that needle is fully threaded.


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