Dean Baker had an interesting post in HuffPo on August 2nd on the Alan Blinder/Mark Zandi study. It’s the best take on it I’ve seen thus far. He says:
“. . . A new study by Princeton University Professor Alan Blinder and Mark Zandi, the chief economist at Moody’s Analytics, examined the impact of the TARP and the related Fed and FDIC bailout programs. The study found that without the bailout, GDP would have declined by another 6.5 percent and the economy would have lost another 8.5 million jobs. In other words, things might be bad now, but if we didn’t shovel trillions in loans and loan guarantees to Goldman Sachs and the rest of the Wall Street gang, they would be even worse.
“Before we start thanking Goldman for taking our money, it is worth taking a closer look at the study. The big story here is the counterfactual. What does the study assume the Fed and Treasury would have done if we had not passed the TARP and the Fed had not come through with its vast array of emergency loan and loan guarantee programs?
“The answer is that the study assumes that they would have done nothing. In other words, the question asked by the study is “what would the world look like if the federal government had done absolutely nothing to counter the economic and financial downturn resulting from collapse of the housing bubble?”
“This counterfactual seems more than a bit unrealistic. Suppose we had let the market work its magic and put Goldman, Citigroup, Bank of America, and Morgan Stanley into bankruptcy. Suppose that once these firms were in receivership and their bank units were in the hands of the FDIC, the Fed flooded the system with liquidity. How would this situation compare with the situation where trillions of taxpayer dollars were put at the discretion of Goldman and the rest through TARP and the Fed’s special facilities?
“The Blinder-Zandi study tells us absolutely nothing about this scenario. In other words, Blinder and Zandi have constructed an absurdly unrealistic counterfactual and told us that the TARP was much better than this absurd scenario. This is like saying that people who don’t eat chicken will starve to death. Under the counterfactual that people who don’t chicken don’t eat anything else either, they certainly will starve to death.
“But that is not a serious analysis of the benefits of eating chicken, and Blinder and Zandi have not given us a serious analysis of the benefits of the TARP. . . . “
Of course, Dean Baker is completely correct. But this sort of thing is done all the time in Washington “think tanks.” It’s called policy analysis and it makes a pretense of being objective. But really if it involves evaluation of things that have already been done it never gets at the counterfactuals, or, at least not at very many of them, because its purpose is to make a case either for or against what has already been done, and not really to do an “objective” measurement of impact.
If the “policy analysis” involves policy scenarios and projections, as, for example, the alternative fiscal scenarios CBO has been peddling lately, there’s always a very limited selection of scenarios fitting the policy biases of the “objective” think tank, or of the Government agency doing the study, and a lack of consideration for other scenarios that might suggest different policies.
So, I have some simple questions for the Washington network of progressive organizations that has managed to find funding for their lobbying efforts on Government policy. Why don’t you have any simulation models that can project what the consequences would have been if Dean’s counterfactual had been implemented?
Just how many jobs would have been created by a $1.6 Trillion stimulus devoted much more to infrastructure and other productive Federal Spending rather than to tax cut?
How many jobs would have been created if the banks had been taken into resolution and the Government would have supplied liquidity to small businesses and to the economy, more generally?
How many jobs would have been created if Congress had passed HR 676 (Medicare for All) and put the insurance companies out of the basic health insurance business?
What would be the GDP growth by now if these things had been done in the Spring of 2009?
What kinds of deficits would we be looking at if all these things had been done?
And are there no economic simulation models out there that can answer questions like this continuously, so that all of us can have a much better and more objective context for evaluating Congress and the Executive, and so we no longer have to deal with any more analyses of the benefits of eating chicken compared to the benefits of eating nothing at all?
(Cross-posted at FireDogLake and Fiscal Sustainability).