Economists agree: Legislation Reid led to passage prevented economic collapse
Research ››› ››› TERRY KREPEL & DAVID SHERE
Right-wing media have mocked Senate Majority Leader Harry Reid for saying that "But for me, we'd be in a worldwide depression." In fact, economists have credited legislation that passed the Senate under Reid's leadership for averting a far deeper economic collapse.
Reid defends his economic record
Reid: It's no solace to the jobless to say, "but for me we'd be in a worldwide depression." From an interview with Reid on the October 21 edition of MSNBC's The Ed Show:
REID: Nevada, for 20 years, was at the top of the economic food chain. If you want a good job, come to Nevada. If you want to invest in real estate, no place better in America than Nevada. If you want to get a good job, come to Nevada. Well, when Wall Street collapsed -- which, by the way, she said it was caused because of too much regulation -- we had farther to fall than any other state.
ED SCHULTZ (host): And the state has dropped farther than any other state?
REID: Oh yes, because we were at the top and we've fallen very hard. So people have been hurting, and I understand that, and it doesn't give them comfort or solace for me to tell them, you know, but for me we'd be in a worldwide depression. They want to know what I've done for them, and that's why it's important for me, any chance I get, to say that my number-one job is to create jobs.
Economists agree that TARP, stimulus helped avert depression
Blinder and Zandi: Policies "probably averted what could have been called Great Depression 2.0." In July, former Federal Reserve vice chairman Alan Blinder and Moody's Analytics chief economist Mark Zandi issued a report citing analytic models to demonstrate that the "multifaceted and bipartisan" response to the financial crisis, including the Troubled Asset Relief Program and the American Recovery and Reinvestment Act - both of which passed the Senate under Reid's leadership -- had a "huge" effect on real GDP, jobs, and inflation, and "probably averted what could have been called Great Depression 2.0":
The U.S. government's response to the financial crisis and ensuing Great Recession included some of the most aggressive fiscal and monetary policies in history. The response was multifaceted and bipartisan, involving the Federal Reserve, Congress, and two administrations. Yet almost every one of these policy initiatives remain controversial to this day, with critics calling them misguided, ineffective or both. The debate over these policies is crucial because, with the economy still weak, more government support may be needed, as seen recently in both the extension of unemployment benefits and the Fed's consideration of further easing.
In this paper, we use the Moody's Analytics model of the U.S. economy -- adjusted to accommodate some recent financial-market policies -- to simulate the macroeconomic effects of the government's total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government's response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.
The U.S. economy has made enormous progress since the dark days of early 2009. Eighteen months ago, the global financial system was on the brink of collapse and the U.S. was suffering its worst economic downturn since the 1930s. Real GDP was falling at about a 6% annual rate, and monthly job losses averaged close to 750,000. Today, the financial system is operating much more normally, real GDP is advancing at a nearly 3% pace, and job growth has resumed, albeit at an insufficient pace.
From the perspective of early 2009, this rapid snap back was a surprise. Maybe the country and the world were just lucky. But we take another view: The Great Recession gave way to recovery as quickly as it did largely because of the unprecedented responses by monetary and fiscal policymakers.
A stunning range of initiatives was undertaken by the Federal Reserve, the Bush and Obama administrations, and Congress (see Table 1). While the effectiveness of any individual element certainly can be debated, there is little doubt that in total, the policy response was highly effective. If policymakers had not reacted as aggressively or as quickly as they did, the financial system might still be unsettled, the economy might still be shrinking, and the costs to U.S. taxpayers would have been vastly greater.
Krugman: Government intervention helped avert "second Great Depression." In his August 9, 2009, New York Times column, Nobel laureate Paul Krugman wrote that governmental actions kept the U.S. from going into "a second Great Depression":
A few months ago the possibility of falling into the abyss seemed all too real. The financial panic of late 2008 was as severe, in some ways, as the banking panic of the early 1930s, and for a while key economic indicators -- world trade, world industrial production, even stock prices -- were falling as fast as or faster than they did in 1929-30.
But in the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year.
So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government.
Probably the most important aspect of the government's role in this crisis isn't what it has done, but what it hasn't done: unlike the private sector, the federal government hasn't slashed spending as its income has fallen. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.
The point is that this time, unlike in the 1930s, the government didn't take a hands-off attitude while much of the banking system collapsed. And that's another reason we're not living through Great Depression II.
Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan -- a number that will grow over time -- and that the stimulus has played a significant role in pulling the economy out of its free fall.
All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.
IMF's Strauss-Kahn: "I think what the U.S. is doing today is the right thing." In a September 13 interview on CNBC, Dominique Strauss-Kahn, managing director of the International Monetary Fund, said "The fact that the stimulus was absolutely useful is not challenged by anyone now," adding, "I think what the United States is doing today is the right thing. ... I think as long as they will support [recovery efforts], finally it will pick up and create jobs."
Blinder: TARP prevented "financial cataclysm." Blinder wrote in a June 16 Wall Street Journal column that "to say that the president's policies either had no effect or were harmful flies in the face of both logic and fact." He continued:
While it's certainly too early for historical perspective on the stunning events of 2007-2009, I venture to guess that, when the history of the period is written, it will read something like this: For a host of reasons the U.S. economy was struck by a calamitous financial crisis followed by a vicious recession. The government--including two administrations, Congress, and the Fed--marshaled enormous resources to save the financial system and to fight the recession. It worked.
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.
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.
U.S. Chamber president: Stimulus needed because "we thought we were days away from a global recession." A July 14 CBSNews.com article quoted Tom Donohue, president of the U.S. Chamber of Commerce, as saying that the Chamber backed the stimulus because "we thought we were days away from a global recession." The article further reported: "While the stimulus has not created as many jobs as was hoped for, Donohue said, 'Would I do it again at the same time? Hell yes.' "
AEI's Malkin: Policy response "averted" global depression. From a January outlook report by the American Enterprise Institute's John H. Malkin:
We can expect 2010 to be a volatile year. This likelihood is underscored by looking back at 2008 and 2009. Two thousand eight was a highly volatile year leading up to the collapse of Lehman Brothers in September, which was followed by the risk of a total systemic meltdown. That sharp and obvious risk spike prompted massive policy responses that were simply the largest that central banks, with rate cuts and liquidity provision, and governments, with tax cuts and spending increases, could manage. The result -- beginning in March 2009 -- was a linear rise in the prices of risky assets, the result of massive relief once the slip into a global depression had been averted and the acute phase of the crisis in the financial sector had passed.
Nowakowski: Policies have "averted depression." In a September 13 column, David Nowakowski, director of credit strategy at Roubini Global Economics, wrote that the Federal Reserve's fiscal policies, "along with the fiscal stimulus," have "averted depression, reversed a short bout of deflation, and helped unemployment from reaching 1930's levels."
Romer: Policies made difference between recovery and "second Great Depression." In her September 1 farewell speech, Christina Romer, outgoing chairman of President Obama's Council of Economic Advisers, praised the stimulus package and the Obama administration's use of TARP funds and said: "I am proud of the recovery actions we have taken. I believe they have made the difference between a second Great Depression and a slow but genuine recovery.
Right-wing media mock Reid
Fox & Friends: "So he sounds like a superhero. ... Maybe he doesn't get the cape so fast." On the October 22 edition of Fox & Friends, co-hosts Steve Doocy and Brian Kilmeade mocked Reid as thinking of himself as a "superhero":
DOOCY: So he sounds like a superhero. And in fact, if you would wonder what Harry Reid as Super Harry would look like, it would be something like that.
KILMEADE: Right, and he has Bill Clinton -- excuse me -- the first lady and the president coming in to try to save him. It's amazing, Superman needs some help at the last minute.
DOOCY: So, and his spokesperson said, when queried about it, he said, look, he helped get that stimulus package through that saved the world. But we heard within the last month or so that it reportedly -- the really smart people who figure out when recessions start and end, they said that the recession actually ended before the stimulus kicked in.
KILMEADE: Well, look, Edwin --
DOOCY: Maybe he doesn't get the cape so fast.
KILMEADE: Maybe he doesn't want to tout the stimulus package, especially in light of the president of the United States saying on record, "I learned in my first two years that there's no such thing as a shovel ready project." That was supposed to be the work that the stimulus project provided.
The segment was accompanied by a cartoon image of Reid in a superhero-style outfit:
Limbaugh: "That's Obama's line." On the October 22 edition of his radio show, Rush Limbaugh said of Reid's statement: "That's Obama's line. ... I have never been so disappointed in my life when I saw it was uttered by Dingy Harry." Limbaugh added, "And then I thought about Obama seeing the headline. I bet Obama called Reid and chewed him out but good. If anybody on this planet is going to take credit for saving the world from anything, it's Obama."
NRO's Lopez: "Oh, the things one is moved to say while on The Ed Show!" Kathryn Jean Lopez of National Review Online wrote of Reid's remarks, "Oh, the things one is moved to say while on The Ed Show!" She added, "A little last-week gift for Sharron Angle? Barney Frank might try that line on, too."
Powers: Reid thinks "he's Bruce Willis in Armageddon, but he's "nothing but the asteroid." Doug Powers of MichelleMalkin.com echoed the debunked claim that the Obama administration is solely responsible for recent increases in the national debt by writing, "If Harry Reid hadn't agressively [sic] pursued his patriotic constitutional duty of spending as much money as possible, the world would be in a bread line as we speak." Powers added that "Reid wants everybody to believe that he's Bruce Willis in Armageddon, when in fact it's now common knowledge that he's been nothing but the asteroid for far too long."
Ace of Spades: "Ah, the life of a selfless savior." Under the headline "Harry Reid: You Know Who Saved You From Another Great Depression? Me, Harry Reid, That's Who." DrewM of Ace of Spades HQ added, "And yet, people don't think it's enough. Ungrateful bastards. Ah, the life of a selfless savior."
Weekly Standard's McCormack: "People of the world, take note: Harry Reid says he saved you from economic depression." John McCormack of The Weekly Standard wrote, "People of the world, take note: Harry Reid says he saved you from economic depression." He added, "Unfortunately, Reid can't say the same to Nevada voters."
The Blaze: Reid "takes credit for saving humanity." Glenn Beck's website The Blaze linked to a video of Reid's interview under the headline, "Harry Reid takes credit for saving humanity from 'world wide depression.' "
AllahPundit: "Good news from Harry Reid: Harry Reid saved us from a worldwide depression." AllahPundit of HotAir.com wrote: "Does he mean ... TARP?... TARP was famously (or rather, infamously) an initiative spearheaded by the dreaded Bushitler and his lackey Hank Paulson. It drew bipartisan support; it wasn't some sort of Harry Reid brainstorm. And besides -- voters hate it." AllahPundit added "Or does he mean the stimulus, which voters also dislike thanks to its porkiness and the fact that they spent $800 billion only to bog down in 9.6 percent unemployment...?"
NewsBusters: Reid statement "arrogant" like Ali. In an October 22 blog post, NewsBusters associate editor Noel Sheppard wrote of Reid's statement, "Frankly, this was about as arrogant a statement as ever uttered on national television by anyone other than Mohammed [sic] Ali."