This surprising result -- that the failure to eat
chicken leads to starvation -- would be shown true using
the same methodology of a new study on the impact of the
TARP. The study, by Princeton University Professor Alan
Blinder and Mark Zandi, the chief economist at Moody's
Analytics, examines the impact of the TARP and the
stimulus on economic growth and unemployment. It finds
that GDP would be 11.5 percent lower in 2010 had it not
been for these two policies, with about three quarters
of the benefits attributable to the TARP and various
Fed/Treasury/FDIC policies that provides aid to the
While the analysis of the stimulus is pretty standard
and very much in keeping with other estimates, this is
not the case with the analysis of the financial sector
policies. The problem with the study is the implicit
counterfactual. It effectively assumes that if we did
not do the TARP and related policies, that we would have
done nothing even as the financial sector melted down.
This is comparable to doing an analysis of the benefits
of eating chicken where the counterfactual is that
people eat nothing. Needless to say, we would find very
large benefits to eating chicken in such a study.
Suppose as an alternative counterfactual, we let the
market do its work. Citigroup, Goldman Sachs, Bank of
America, Morgan Stanley would be out of business, with
their highly paid CEOs walking the unemployment lines.
Rather than doing nothing, we could have the Fed
flooding the system with liquidity (much as it did),
without having to worry about money being siphoned off
by bonuses for the honchos who led these banks to ruin.
It would be difficult to fully flesh out the
counterfactual in this scenario, but it is certainly
more plausible than the one described by Blinder and
Zandi. If we need a study to make us feel good about the
fact that the Wall Street is rich while the rest of the
country is poor, it fits the bill, but it is not serious
analysis and the media should not treat it as such.