According to a new study:
Saturday, Oct 31, 2015 09:30 AM EST
Paul Krugman has taught them nothing: Republicans would tank the economy again, given another chance
The stimulus prevented a second Great Depression, a new report shows. What would've helped more? An even bigger one
Paul Rosenberg
The idea that George W. Bush “kept us safe” has rightly been exposed to ridicule recently by Donald Trump. But Bush also failed miserably on another front: keeping us safe economically, as he presided over the biggest economic catastrophe since the Great Depression — and his presidency was already an economic disaster before that, per Nobel Laureate Joseph Stiglitz.
On this second front, the GOP blame-shifting centers on Obama, in order to virtually erase the epic market failure from history. Just as Bush is supposed to get a pass for 9/11, while getting credit for “keeping us safe” afterwards, he’s also given a pass for the housing bubble and the financial crisis which gave us the Great Recession, so that all blame can be focused on Obama, who supposedly made things worse with his “job-killing” policies.
In the real world, empirically-based economists know this is ridiculous. In the third quarter of 2010, for example, the Congressional Budget Office estimated that the stimulus bill “increased the number of people employed by between 1.4 million and 3.6 million.” This was typical of CBO reporting of the impact the stimulus had, but the totality of policy responses was much broader than that, and a new report from the Center on Budget and Policy Priorities by economists Alan Binder of Princeton and Mark Zandi of Moody Analytics updates their earlier work in 2010 to first provide a comprehensive overview and then draw lessons for the future.
On the first point, Zandi told a conference call briefing, “In its totality it was a resounding success,” adding, “That sounds a little odd,” because of how bad the recession was. “It was indeed a great recession, a very painful time, we’re still not completely free of it,” he said. But it could have been so much worse. “If not for the policy response, the recession would have been, as Alan is fond of saying, the Great Depression 2.0.”
More specifically, the paper estimates that, without that response:
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 might 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.
That alone should be enough to silence right-wing critics of government activism in general, but of course it won’t be. “I know there are still denialists who think the economy would have been just great in 2009-2010 if the government just left it alone, but I doubt they will read the Blinder-Zandi paper,” economist Dean Baker told Salon. Baker, the co-director of the Center for Economic Policy Research, is one of a handful of economists who warned of the financial crisis before it occurred (none of whom, significantly, relied on standard macro-economic models). “For everyone else,” Baker said, “you’re left asking, ‘What is this really telling us?’”
“Denialist” is an apt description. A 2010 paper by Adam Kessler in the Real-World Economics Review, “Cognitive dissonance, the Global Financial Crisis and the discipline of economics” examined the views of economists opposed to Obama’s stimulus at the time, believers in lassez faire (BLF) who signed a letter from the Cato Institute to that effect, as opposed to economists in general. Kessler theorized that BLF responses to the crisis and ensuing recession could be explained in terms of cognitive dissonance, saying that, “Cognitive dissonance theory predicts that when real-world events ‘disconfirm’ deeply-held beliefs this creates psychological discomfort in persons and they will respond by means of distortion and denial.”
BLFs naturally tend to believe that free markets work perfectly well and thus when they don’t government must be held to blame, in denial of what has just occurred. Kessler queried this group of BLFs and a sample of economists from the American Economics Association, asking about their views were on 10 possible causes of the Great Recession. One possibility was the 1977 Community Reinvestment Act (CRA), which requires banks to reinvest in communities they serve which have traditionally been redlined (called “assessment areas” under the law). As the paper’s abstract explains:
The notion that the CRA is a major cause of the crisis apparently has great resonance among the BLF but is demonstrably false. Among other results, 46 percent of the signers of the letter believe that the CRA was one of three top causes of the crisis compared to 12 percent of the “other” economists. I conclude that the BLF exhibit symptoms to cognitive dissonance.
There are a variety of lines of evidence against the CRA hypothesis, (some in the paper, more here and here) most strikingly the fact that “Only 6 percent of high-priced loans to low-income borrowers or in low-income neighborhoods by lending institutions that fall under the CRA legislation were made in their CRA assessments areas.” Far more money was put at risk elsewhere, most of it by institutions not covered by the CRA. “The CRA did it” is an economic denialist narrative, every bit as much as “sunspots did it” is a global warming denialist narrative. Both are easily refuted by data — data which denialists simply choose to ignore.
