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Bernstein on Lessons from the Great Recession


CBPP Senior Fellow Jared Bernstein’s new PostEverything post highlights a major new paper that we commissioned from former Fed vice chair Alan Blinder and Moody’s chief economist Mark Zandi on the effectiveness of policies responding to the financial crisis and Great Recession.  Here are some excerpts:

[The Blinder-Zandi paper is] easily the most thorough look at the impact of the full spate of counter-cyclical actions taken by the government and the Fed to protect the U.S. economy from the gale forces of the Great Recession. . . .

Absent these interventions, according to Blinder and Zandi’s analysis:

— Real GDP [gross domestic product] would have fallen 14 percent from its peak to its trough, instead of its actual decline of 4 percent.

— The downturn, which ended in mid-2009 — that’s when GDP began to grow again — would have lasted twice as long.

— More than 17 million jobs would have been lost, about twice the actual number.

— Unemployment rose to 10 percent, which is obviously far too high.  But it would have peaked at around under 16 percent, which in today’s job market equals 9 million fewer unemployed people . . . .

— In a particularly notable finding, B & Z find that the federal budget deficit would have peaked at -20 percent of GDP, instead of its actual peak of -10 percent.  That may sound counterintuitive, but it’s actually just counter-cyclical.  By preventing the huge losses in GDP and jobs, the interventions kept the budget deficit from getting a lot bigger.

— Today’s economy would be far weaker than it is — with real GDP about $800 billion lower, 3.6 million fewer jobs, and unemployment still at 7.6 percent.  That translates to close to 4 million fewer unemployed in today’s labor force.

This all may be a bit hard to wrap your head around if you’ve heard the critics of the Recovery Act talking about the “failed stimulus.”  But that’s just another example of the way ideology is crowding out facts in today’s politics.

In reality, the stimulus package provided desperately needed relief to states, extra nutritional support and job opportunities to poor families, extended unemployment benefits to jobless households to tide them over before the engine of job creation finally turned over in 2010, jobs to production workers repairing public infrastructure, investments in clean energy, tax breaks to struggling families, low-cost loans to small businesses, and much more.

The Fed, as noted, took interest rates down as far as they could go, while it and the Treasury helped to reflate the credit system, an essential part of the financial rescue efforts.  GM and Chrysler might well have faced Chapter 7 bankruptcy and liquidation as their failures coincided with the collapse of private credit markets. Instead, their bailouts saved 800,000 jobs, according to B & Z.

Here’s another important reminder from this study: Stimulus measures like these are temporary, and as such they’re nothing like the budget busters their critics claim. They get into the system when they’re needed and leave the system when their work is done.  As noted above, the deficit would have been higher, not lower, had we pursued the Hooveresque liquidation strategy that many conservatives urged at the time.  Today’s budget deficit of about $440 billion, 2.5 percent of GDP, is at its lowest level since 2007.

In fact, I’d argue (as do B & Z) that if anything, the counter-cyclical measures were too temporary.  They ended too soon, as the pivot toward deficit reduction got underway well before the private side of the economy was ready to grow on its own. . . .

[W]e need to absorb the lessons B & Z offer, both regarding what we got right and what we got wrong.  Counter-cyclical economic policy clearly works, and unless we want to engender needless suffering the next time a recession hits, that’s a fact that every policymaker needs to learn.