By Ezra Klein
Sunday, August 1, 2010; G01
TARP is horribly unpopular. The stimulus is pretty unpopular. But does that mean they were bad policies? Not according to a new paper by Mark Zandi, Moody's chief economist and a former adviser to both the McCain and Obama campaigns, and Alan Blinder, a Princeton economist who has served as vice chairman of the Federal Reserve's Board of Governors.
Zandi and Blinder offer the first comprehensive estimate of our full response to the crisis: Absent the financial rescue and the stimulus, "GDP in 2010 would be about 6 ½ percent lower, payroll employment would be less by some 8 ½ million jobs, and the nation would now be experiencing deflation." I spoke to both men last week about how they got to their estimates, why the economy is so bad if the response was so good, and where we go from here. What follows are edited excerpts from the two interviews.
Q. This paper is heavily based on the model Moody's uses for economic forecasting. But these models have come under some criticism: Some say that they're just abstract equations and that you can get whatever answer you want by tweaking the numbers. So what is this thing? Who uses it?
Mark Zandi: I developed the model almost 20 years ago. I'm an economic consultant. I've got clients in many large, private-sector institutions. And we provide macroeconomic forecasts for them. The model has been used by banks to stress test themselves. Bank of America, J.P. Morgan, SunTrust and others used it to run scenarios on their solvency under different conditions. The business community uses it to figure out how to account for macroeconomic changes in their own budgeting and planning.
And how is it built? What are the numbers based on?
Zandi: I've gone back to every recession and depression and looked at the policy efforts to address the downturn, and try to at least capture the different ways in which policymakers have tried to generate a recovery. And what we've done in the Great Recession, some of it is unique, but most of it has been done many times before. Tax cuts, emergency unemployment benefits, aid to state government: These are things we've done every single time.
Alan Blinder: Different models do give different answers. That's why we say we welcome others to try and estimate this. But you can't make anything come out that you want. These models are fitted to real data. They're not just made up. They describe how the U.S. economy worked in the past.
And the model says that what we did this time broadly worked. In particular, it says the financial rescue worked. In other words, George W. Bush, Hank Paulson and Ben Bernanke deserve some credit for what they did in the immediate aftermath of the crisis.
Zandi: Absolutely! I think TARP was incredibly important. The mistake was for Congress to vote it down initially. That eviscerated confidence and took the equity market down to a whole other level and exacerbated our problems. By that time, the damage was so serious that the intent of TARP had to shift. Originally, it was about buying bad assets, which would've been more graceful. But because of the "no" vote and the damage it did, they had to make TARP a source of capital for the financial system. The capital purchase program was ultimately the one key thing that was necessary for stabilizing the financial system and the economy.
So why is TARP so horribly unpopular then?
Blinder: People feel it was successful in ways they're not happy with: That is, the bankers are making a lot of money now. That part of the bailout cost the government less than nothing, as the government is turning a profit on it. But in some moral sense, these bankers did not deserve to be saved. The problem was that if they went down with the ship, we were going down, too. The right way to think about the banker benefits was collateral damage in a war to save the economy. Had we not done that, things would've been horribly worse for everybody. So I don't hesitate. To me, it's not close.
Do you think it was well-designed?
Blinder: TARP should've come with more strings attached -- a lending requirement, for instance. If banks were going to get this money, they should've had to lend with it. I would've put restrictions on banks' ability to pay dividends, and tougher restrictions on executive pay. I also think it was a very big mistake for Secretary Paulson to force this money on banks that didn't want it. I can hardly say his theory without laughing: He wanted to reduce the stigma of taking it. The market knew who was strong, and the strong banks, like JP Morgan, went to the media and loudly said that the government is forcing this down our throats.
And what about the stimulus? Famously, the Obama administration predicted it would keep us beneath 8 percent unemployment. That obviously didn't happen. Does that mean it was a failure?
Zandi: The original forecast was just a bad forecast. The unemployment rate was already at 8 percent by the time stimulus passed. We just didn't know it because the data lags. What really matters is what the unemployment rate would've been if we didn't do stimulus, and in my view, it would clearly have been higher.
If the response to the crisis was effective, then why do we seem to have stalled out in recent months? Since May, the recovery has been lagging, hiring hasn't been very strong, and there's a general sense that the economic momentum we saw earlier in the year has dissipated a bit.
Blinder: Well, I know why it is, though it pushes the question back one level: Given the growth of GDP and the amount of spending that's come online, the number of jobs created has been puny. That's mitigating the usual virtuous circle where spending creates jobs and those people spend and that creates jobs and so on. That process is going on, but not at the level we expected. That pushes the question back to how come there's not more hiring. My speculation is that it's doubts about the durability of the recovery and firms not wanting to hire more permanent workers until they're more confident this is for real.
So what would you do going forward?
Blinder: I would do two things, both aimed at jobs. I would do the so-called new jobs tax credit on a much bigger and better scale than the HIRE Act, which was a baby step. The second thing I would do is a WPA-like program of temporary, direct, public hiring. People could work in parks, in maintenance, the many paper-shuffling jobs there are in government. You could save a lot of state and local jobs that would otherwise be terminated.
Zandi: If the unemployment rate was peaking at 7 percent, I'd say no worries, no need for more stimulus. But I'm nervous about 9.5 percent unemployment when you have a zero percent interest rate and a huge deficit. If we're all wrong and we go into recession, we've got no policy response. So I think it's prudent to err on the side of doing too much rather than too little. And we can do that. We're not Greece or Britain or Germany. We have a 3 percent 10-year Treasury yield. We have always solved our fiscal problems, and the world has faith we will solve our future ones. So we have the resources.