Our guest blogger is Heather Boushey, Chief Economist at the Center for American Progress Action Fund.
In their report, How We Ended the Great Recession, Economists Alan Blinder and Mark Zandi estimates the effects of the financial and fiscal policies enacted since the crisis began in 2008 on the economy. Their conclusion is that had the combined financial and fiscal policies not been enacted, “GDP in 2010 would be about 6.5 percent lower, payroll employment would be less by some 8.5 million jobs, and the nation would be experiencing deflation.”
Blinder and Zandi break out their estimates separately for the financial policies and the fiscal policies. They estimate that the American Recovery and Reinvestment Act and other fiscal policies have saved or created 2.7 million jobs and without them, unemployment would stand at 11 percent and job losses would have totaled 10 million. On top of this, they estimate that if nothing had been done to address the financial crisis — no Troubled Asset Relief Program, no bailout of American International Group Inc, and no investment in the auto industry — our economy would have 5 million fewer jobs than we do today and unemployment would be sharply higher, at 12.5 percent.
However, one tidbit in the report that has received little notice is that by acting, Congress actually reduced our potential deficit problem. Given the policy steps taken, Blinder and Zandi estimate that by the end of the 2010 fiscal year, the federal budget deficit will be $1.4 trillion and it will fall to $1.15 trillion in fiscal year 2011 and $900 billion in fiscal year 2012.
However, had Congress done nothing, the deficit would have ballooned even higher, hitting over $2 trillion by the end of the 2010 fiscal year, $2.6 trillion in fiscal year 2011, and $2.25 trillion in fiscal year 2012. That’s right, doing nothing would have meant that the 2012 federal budget deficit would likely be over 2.5 times as large as taking the steps we took.
How’s this possible? Quite simply: a big reason that the deficit is rising is because unemployment has risen and incomes are falling. As my colleague Michael Linden has pointed out, the reason for the deficit is the recession itself:
The great deficit of 2009 was the result not just of increased spending, but also of dramatically lower tax revenues. In 2009, federal receipts were $419 billion below 2008 levels, a 17 percent drop, which was the largest decline from one year to the next in more than 70 years. Individual income tax receipts decreased by 20 percent, and corporate income tax revenues plummeted by more than 54 percent, which means corporations paid less than half in taxes than they paid the year before.
Of course, the main culprit here is the economic recession. Corporations paid lower taxes because they made lower profits. Individuals paid less in taxes because they lost their jobs, didn’t get raises, and didn’t make as much on their investments. The tax cuts directed at both families and businesses passed as part of the American Recovery and Reinvestment Act had a part to play here as well—about 15 percent of the decline in tax revenues can be attributed to provisions in ARRA—but the overall trend was driven primarily by the weak economy.
By taking actions to avert greater unemployment, we averted a bigger deficit. It seems there’s a win-win here that everyone should get on board with: the steps taken to shore up our economy have ended up being a better investment for jobs and for the deficit than doing nothing at all.