Yesterday, the Senate Budget Committee held a hearing to assess the federal policy response to the economic crisis. Appearing before the Committee were:

  • Alan S. Blinder, Gordon S. Rentschler Memorial Professor of Economics and Public Affairs, Founder and Co-Director, Center for Economic Policy Studies, Princeton University
  • Mark Zandi, Chief Economist, Moody’s Analytics
  • John Taylor, Mary and Robert Raymond Professor of Economics, Stanford University, and George P. Shultz Senior Fellow in Economics, The Hoover Institution

In his opening remarks, Chairman Kent Conrad (D-ND) stated that while there are currently two problems still facing the nation – near-term economic weakness and a longer-term budget crunch – the response taken by the federal government to the economic crisis thus far has helped avoid greater crisis. Quoting a recent study by Drs. Blinder and Zandi, he credited the federal response with averting “what would have been called the Great Depression 2.0.” Ranking Member Judd Gregg (R-NH) disagreed with Chairman Conrad’s sentiment, voicing his opinion that the federal response has only aggravated the problem, noting that people on Main Street see the federal government as part of the problem, not part of the solution.

Dr. Blinder summarized the Blinder/Zandi study, in which they estimated that the effects of the federal response on the economy were large, but stressed the need for greater focus on unemployment going forward. He stated that a “field of dreams strategy,” built around the notion that if the government shores up GDP, jobs will come, won’t work, noting that such a strategy is too costly and companies remain too reluctant to hire.

Dr. Zandi concurred with Dr. Blinder, noting that while the effect of any one aspect of the federal response is debatable, the totality of the response is impressive. Dr. Zandi characterized the federal response as having two objectives – to stabilize the financial system and to jumpstart recovery. He described the stabilization prong as comprising three specific policy responses, without which the economy would not have stabilized: (1) the capital purchase program funded by TARP, which he described as a “slam dunk success,” (2) the FDIC’s temporary liquidity guarantee fund, which he believes helped to quickly alleviate the liquidity problem, and (3) the bank stress tests, which he credited with being very successful in ending the financial crisis. In assessing the recovery prong of the federal response, Dr. Zandi noted the fact that the recession ended at the same time that the stimulus spending was at its maximum, remarking that there is no coincidence in this. Urging policy makers to remain aggressive in their response to the crisis, Dr. Zandi encouraged the Committee to focus on three things: (1) assuring that tax rates are not increased in 2011, (2) requiring Fannie Mae and Freddie Mac to be more aggressive in facilitating the refinancing of mortgages and (3) endorsing a tax holiday for employers who start hiring.

Dr. Taylor disagreed with Drs. Blinder’s and Zandi’s opinion that the federal policy response has been effective in stemming the effects of the economic crisis, testifying that he believes the federal response did not stimulate the economy at all. Asserting that the government’s efforts, which included sending stimulus checks to individual taxpayers, changing tax withholdings and increasing government spending, had no noticable effect on consumption, Dr. Taylor urged the Committee to return to principles which have been proven to work in the past and to move away from temporary, targeted policies that are not shown to help the economy.

Chairman Conrad concluded the hearing by stating that the long-term fiscal outlook of the nation needs to be addressed and a plan needs to be put in place to lower the nation’s debt levels.