Study: Government response to crisis staved off new Great Depression

The paper says the much-criticized Troubled Asset Relief Program (TARP), Federal Reserve policies that increased the supply of money and stress tests to the nation’s big banks likely had a more powerful effect on the economy than the $787 billion stimulus enacted by Congress.

But it also concluded the stimulus raised GDP in 2010 by about 2 percent and held the unemployment rate 1.5 percentage points lower than it otherwise would have been, adding 2.7 million jobs to U.S. payrolls.

Without any of the policies, the authors concluded real GDP would have fallen by 7.4 percent in 2009 and a further 3.7 percent in 2010. Instead, GDP fell by 2.4 percent in 2009, and is expected to expand by 2.9 percent in 2010.

Without the financial policy responses but with the stimulus, the two authors argue the recession would only be winding down now. Real GDP would have declined by 5 percent in 2009 under that scenario, they argue.

The effect on employment without the policies would have been disastrous, according to the report, with unemployment peaking at 16.5 percent and a federal deficit surging above $2 trillion in 2010 and $2.6 trillion in 2011. The authors said that with corresponding deflation in prices and wages, those conditions would have resembled the Great Depression of the 1930s.

Zandi and Blinder are not neutral observers.

Zandi advised Democrats in Congress on the stimulus and pressed lawmakers to approve more stimulus measures, such as an extension of unemployment benefits, to further spark the economy. He also advised the Republican presidential candidate, Sen. John McCain (Ariz.), during the 2008 campaign.

Blinder is a left-leaning economist who has repeatedly argued that Obama’s policies righted the economy. He was mentioned as a possible successor to Federal Reserve Chairman Ben Bernanke.