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Blinder and Zandi: Policy Responses to Great Recession a Resounding Success

In a major new paper for CBPP’s Policy Futures initiative, Alan Blinder, former Federal Reserve Vice Chairman, and Mark Zandi, chief economist of Moody’s Analytics, explain that “the massive and multifaceted policy responses to the financial crisis and Great Recession — ranging from traditional fiscal stimulus to tools that policymakers invented on the fly — dramatically reduced the severity and length of the meltdown that began in 2008; its effects on jobs, unemployment, and budget deficits; and its lasting impact on today’s economy.”

Without the policy responses of late 2008 and early 2009, Blinder and Zandi estimate that:

  • The peak-to-trough decline in real gross domestic product (GDP), which was barely over 4 percent, would have been close to a stunning 14 percent.
  • The economy would have contracted for more than three years, more than twice as long as it did.
  • More than 17 million jobs would have been lost, about twice the actual number.
  • Unemployment would have peaked at just under 16 percent, rather than the actual 10 percent.
  • The budget deficit would have grown to more than 20 percent of GDP, about double its actual peak of 10 percent, topping off at $2.8 trillion in fiscal 2011.
  • Today’s economy would be far weaker than it is — with real GDP in the second quarter of 2015 about $800 billion lower than its actual level, 3.6 million fewer jobs, and unemployment at a still-dizzying 7.6 percent.

This landmark paper is especially important because many policymakers argue that the 2009 Recovery Act and other measures didn’t work and that the very notion of the federal government helping to stimulate a weak economy is misguided.  At some point, the economy will fall into another recession or even, as Blinder and Zandi warn, experience another financial crisis.  When either or both occur, policymakers must be ready to use the resources of government to restore a weak economy to health, not stand aside and claim the measures taken to combat the Great Recession failed.

In addition, policymakers must know how to act in effective ways.  The Blinder-Zandi paper examines the efficacy of each measure, or set of measures, taken to stem the Great Recession and financial crisis — from TARP (the Troubled Asset Relief Program) and the rescue of auto companies to Federal Reserve monetary policies to the Recovery Act.  They find, for example, that the Recovery Act added almost 3 million jobs at its apex.

This paper should prove instrumental both in educating policymakers, opinion leaders, the media, and other key audiences in the years ahead about how the extraordinary measures of 2008 and 2009 rescued the economy — and in providing crucial lessons for how policymakers should respond when the economy falters in the future.

Click here to read the full paper.