By Greg Anrig
At the outset of 2009, President-elect Obama awaited his inauguration with the U.S. economy in a near free fall — more than a half a million jobs were disappearing monthly, consumption and investment levels were plummeting, home foreclosures were soaring, credit was frozen, and no remote sign of a turnaround was in sight. Obama and his administration would end up pursuing a wide assortment of ambitious actions to stop the bleeding that, at least for the time being, appear to have accomplished that goal.
In the absence of those steps — particularly the stimulus legislation and the bailout of the financial sector — we would be in the midst of a still severe economic downturn and perhaps even a depression. Instead, economic growth has resumed and the rate monthly job losses has at least tapered off. The economy is far from out of the woods, however, and it’s entirely possible that unemployment will remain high for an extended period unless another round of ambitious governmental initiatives are pursued. Sorting out which policies have worked best and worst during the crisis, to the extent they can be judged in the middle of a story that’s still unfolding, can help to point the way toward next steps that will improve the odds of a happy ending.
Moves That Helped
No Republican members of the House of Representatives and only three Republican Senators voted for the $787 billion American Recovery and Reinvestment Act, which Obama signed into law in February. A recent analysis by the Congressional Budget Office concluded that the stimulus legislation resulted in between 600,000 to 1.6 million more jobs and a GDP between 1.2 percent and 3.2 per higher than would have otherwise been the case. Getting the most bang for the buck in adding to economic growth, according to the CBO, were the elements of the package that provided direct and quick support to state and local governments, purchases of good and services by the federal government, and transfers to lower-income individuals through payments like additional unemployment insurance. Mark Zandi, chief economist of Moody’s Economy.com told the New York Times, “In my view, without the stimulus, GDP would still be negative and unemployment would be firmly over 11 percent.”
Another key component to the administration’s response that appears to have worked in the most important respects was the politically unpopular bailout of the financial sector, which actually began last year, through the so-called Troubled Asset Relief Program (TARP). Initially used to purchase so-called “toxic assets” to improve the balance sheets of imperiled major financial institutions, the program evolved to encompass a combination of equity purchases, loans, and guarantees to stabilize the financial sector. It also entailed major governmental investments and engagement in the nation’s desperate auto industry.
The Congressional Oversight Panel, the Government Accountability Office, and the Special Inspector General for TARP all recently concluded that TARP played an important role in successfully stabilizing financial markets and restoring the flow of credit. Inter-bank lending, which essentially shut down during the crisis, has returned to normal levels. Other lending has also resumed at a reasonably health rate, with the 21 largest banks receiving federal support extending more than $2.2 trillion in new loans since receiving TARP funds. Many of the banks that benefited from TARP have already repaid some or all of the government’s money. Problems persist in the financial sector, as well as the auto industry, but the TARP-related interventions clearly helped to ameliorate the crisis.
Responses That Didn’t Help Much
While the top-line results of the government’s response to the economic crisis look pretty decent so far, you don’t have to look far beneath the surface to start finding plenty of problems and mistakes. For example, many elements of the stimulus bill have not been nearly as cost-effective as the immediate aid to state and local governments, federal purchases, and added unemployment insurance. The CBO found that tax cuts, particularly those that went to upper-income households through an increase in the alternative minimum tax exemption, contributed little to the economy because the money was largely saved. The extension of the first-time homebuyer credit also was largely a waste of money.
Moreover, many costly elements of the stimulus package are not yet far down the spending pipeline, in part because they are contingent on states formulating proposals that meet federal approval. The Education Department’s “Race to the Top” program is one example. While those contingent programs may yet prove to be useful at accomplishing particular policy goals, the time lags they entail delay any positive effects they may have on the economy during a period when joblessness remains in double digits. Considering that stimulus support for state and local governments closed only 30 to 40 percent of their shortfalls, states still have had to dampen their economies by making sizable spending reductions and raising taxes. By trying to simultaneously stimulate the economy and pursue broader long-term educational, energy and other policy goals, ARRA produced less immediate bang for the buck than it probably should have. Moreover, as some critics pointed out at the time, its size appears to not be ample enough to jumpstart the economy and decent job growth. With most stimulus money due to run out by the end of 2010, a strong case can be made for additional federal spending, this time much more narrowly targeted toward the categories that have already proven to be most effective — especially helping to keep afloat drowning state and local governments.
Similarly, the TARP program’s success in achieving its main purpose of stabilizing the financial markets and lending imposed no costs on the leadership of firms whose actions brought the world economy to the brink of collapse. Nothing about TARP’s implementation seems likely to deter a replay of a similar scenario in the future in which taxpayers bail out extremely well large financial institutions and their extremely well compensated executives for taking excessive risks with relatively little cost to them. A year after the crisis, most of the same CEOs and leadership at the huge financial institutions that were disastrously managed remain in place. They remain enormously well compensated and their firms continue to engage in highly leveraged, high risk transactions. The financial regulatory bill proposed by Connecticut Senator Christopher Dodd includes a number of useful reforms and is stronger than the legislation that barely passed the House of Representatives with only Democratic support. But the Senate is likely to significantly water down Dodd’s plan, and prospects are highly uncertain for regulatory reform. The main question, and in many respects the toughest regulatory challenge both politically and substantively, is how to address the basic problem of too-big-to-fail firms that can engage in highly risky, profitable activity backed by implicit taxpayer support when things head south.
Likewise, little has been done to meaningfully help homeowners who were victimized by mortgage lenders who acted unlawfully, or the much larger numbers facing foreclosure in the wake of the real estate bubble’s collapse. Proposals to significantly reduce painful and costly foreclosures by allowing judges to work out so-called “cramdown” modifications of mortgage terms have been rejected in Congress. In contrast to the highly generous federal support for financial firms, the relative absence of public policy responses aimed at alleviating the pain of homeowners caught in the sudden downdraft in real estate values has left millions of households facing severe hardship without a cushion. While it is true that anyone who takes out a mortgage bears responsibility for recognizing the financial risks associated with that action, the government also bears responsibility for failing to police fraudulent lending practices, and perpetuating policies that contributed to the housing bubble in the first place.
Another policy response worth noting was the “cash-for-clunkers” program, in which consumers received government rebates during July and August if they traded in their cars for more fuel-efficient replacements. A study by Edmunds.com, an automotive research organization, found that of the 690,000 vehicles sold, the program led to only 125,000 transactions that wouldn’t have otherwise occurred, and that the average cost to taxpayers per vehicle sold was $24,000. While car dealerships and their employees benefited from the surge in activity during that brief period, the overall impact on the economy relative to the cost of the program appears to have been quite modest, notwithstanding claims to the contrary by the White House. Researchers are still assessing the environmental benefits, but those also appear to be limited and more costly than other policies to achieve the same result would have been.
Overall, the year 2009 would have been far worse economically if the stimulus bill and financial sector bailout hadn’t occurred. But a lot of significant, costly policy mistakes, including inaction on some of the most important problems like underwater homeowners and too-big-too-fail investment institutions, leaves abundant room for improvement in the still precarious months ahead.
