Posted July 29th, 2010 5:57 am

Think Obama’s Stimulus Plan was wasteful deficit spending? Think again.

To Washington conservatives they were egregious examples of “big government” overreach, but the White House’s economic stimulus and bailout policies have saved 8.5m jobs and averted a further slump of 6.5% in US economic output, according to a study by two influential economists.
An in-depth modelling exercise by Moody’s chief economist, Mark Zandi, and a Princeton University expert, Alan Blinder, paints a bleak scenario of a 1930s-style Great Depression if the US government had enacted none of its $1.7tn (£1.3tn) programmes to avert a financial meltdown.
Using historical statistical relationships and a focus on the government’s impact on narrowing credit spreads, the pair found that the downturn would have continued into 2011, with unemployment peaking at 16.5% rather than last year’s actual high of 10.1%.
They believe US gross domestic product would have slumped by 7.4% in 2009 and by 3.7% in 2010, producing a “peak to trough” decline of 12%, rather than the anticipated 4%. Starved of demand, shops and employers would be cutting prices and wages.
“With outright deflation in prices and wages in 2009 to 2011, this dark scenario constitutes a 1930s-like depression,” says the study, entitled How the great recession was brought to an end”.
Thwarting stiff opposition from Republicans in Congress, the Obama administration introduced an economic stimulus package of more than $780bn last year, adding to giveaways of $170bn by the Bush administration in 2008 that included tax refunds to tens of millions of Americans. Adding in banking-bailout measures of $600bn and smaller programmes such as the “cash for clunkers” scheme and a rescue of insurer AIG, total commitments by the US government reach $1.7tn.
Zandi and Blinder say that although economic activity and job creation remain extremely sluggish, the US economy has made “enormous progress” since its nadir last year: “Maybe the country and the world were just lucky. But we take another view: the great recession gave way to recovery as quickly as it did largely because of the unprecedented responses by monetary and fiscal policymakers.”

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