A World Without Stimulus

It’s easy to forget that one of America’s best-loved movies, “It’s a Wonderful Life,” was built around the idea of an apparent failure. But the resonating story line of the Frank Capra classic is about looking deeper to see the success that is really there, by envisioning what life would be like if one positive force had been left out.

In today’s world of commerce, as we try to sort out what is failing and what has worked in this subdued recovery, two widely respected economists offer a vision of how the U.S. economy would have fared without the much-maligned stimulus program and other massive government rescue efforts.

Their answer, in “How the Great Recession Was Brought to an End," is that we would not have even ended the downturn by now without special federal measures including the American Recovery and Reinvestment Act, and the plunge would have been much more savage. Or if policymakers had used only the other recession-fighting tools and left off ARRA-type stimulus, they say about 2.7 million more people would be unemployed.

Not to linger too much on the movie comparison. An economic paper is full of charts and graphs – a far cry from the on-screen magic of James Stewart as small-town banker and all-around good guy George Bailey and Donna Reed as his devoted wife, Mary (plus the first “Bert” and “Ernie” characters).

But in the modern economic-political arguments, the paper offers the intriguing match-up of co-authors Alan Blinder and Mark Zandi. Princeton University’s Blinder was part of President Clinton’s first Council of Economic Advisers before serving a stint as vice chairman of the Federal Reserve Board. Zandi, chief economist at Moody’s Analytics, was an adviser to the 2008 presidential campaign of Republican Sen. John McCain, Ariz., who lost the race to Barack Obama.

Just as George Bailey was unhappy with his messy life and lack of success -- until shown how to appreciate what he had -- Blinder and Zandi are quick to note that high unemployment, huge budget deficits and tepid recovery understandably trigger criticism of the stimulus spending. And they give most credit in halting the Great Recession to historic actions by the Federal Reserve and Treasury to shore up the financial system.

But the economists tell us to imagine a world in which unemployment is now 11 percent, not 9.5, and we start to see how much good the ARRA and other fiscal stimulus have done. We feared a double-dip this year when growth slowed to 2.4 percent in the April-June quarter; Blinder and Zandi say without stimulus spending the recession would have continued to near the end of 2009 or longer, and growth for 2010 would be just 1 percent.

Instead, some of the ARRA’s longer-lasting pieces, such as infrastructure spending on transportation projects, are just now kicking into high gear while earlier measures fade.

So while the stimulus “fell short in some respects,” they say, “without it the economy might still be in recession.”

-- Contact John D. Boyd at jboyd@joc.com.

For the full story: Log In, Register for Free or Subscribe