Stimulus ending "dark economic times" in U.S.: Zandi

WASHINGTON Thu Oct 29, 2009 11:46am EDT

Related Topics

WASHINGTON (Reuters) - Economist Mark Zandi, whose research heavily influenced the $787 billion U.S. economic stimulus plan, said on Thursday that the two-year recession has come to an end, mostly due to the federal government's aggressive response to the downturn.

However, the labor market could take time to recover, he warned.

"It is a tragedy that the nation has been forced to spend so much to tame the financial crisis and end the Great Recession. Yet it has been money well spent," said Zandi, the chief economist at Moody's Economy.com

"The fiscal stimulus is working to ensure that the recent dark economic times will soon be relegated to the history books," he said in testimony prepared for the congressional Joint Economic Committee about the progress of the American Recovery and Reinvestment Act that was passed in February.

Zandi urged a package of tax and spending measures last winter to end what became the longest recession since the Great Depression. Two White House economists who worked on the plan --Christina Romer and Jared Bernstein -- used his research and estimates when projecting the effects of stimulus measures.

BANG FOR THE BUCK

Zandi said criticism of the low portion of stimulus funds already spent, which he estimated at $175 billion, was misplaced.

"What matters for economic growth is the pace of stimulus spending, which surged from nothing at the beginning of the year to about $80 billion in the third quarter. That is a big change in a short period and is why the economy is growing after more than a year," he said.

On Thursday, the Commerce Department reported that the U.S. economy grew 3.5 percent at an annual rate in the third quarter.

According to Zandi, the increase in food stamps in the plan gave the "biggest bang for the buck." He looked at how each stimulus dollar spent or dollar cut in taxes affected gross domestic product.

Financing work-share programs and extending unemployment benefit payments were next in creating the most economic activity per federal dollar spent.

On the other hand, Zandi said the $8,000 housing tax credit that Congress is expected to extend only generated 90 cents worth of activity for every dollar.

JOBS AND HIRING UNCERTAIN

Assistance to state governments produced $1.41 per dollar.

"The decline in income, sales, property and capital gains taxes has been unprecedented and shows only marginal signs of abating," he said about the fiscal crisis that states are currently grappling with.

At the same time states' and cities' borrowing capacity is weakening, he said, leaving federal help as the only weapon against job and program cuts and increased taxes.

"This will be a serious drag on the economy at just the wrong time," he said and suggested Congress consider providing $75 billion in assistance.

The Recovery Board, which tracks the stimulus, will release on Friday a report of how grants and loans have been spent. The sweeping report will likely indicate whether the plan helped ameliorate the country's employment pain -- the national unemployment rate currently stands at 9.8 percent.

"As the benefit of the stimulus fades, businesses must fill the void by hiring and investing more actively," Zandi said. "To date, there is not much evidence they are doing this."

While businesses have curtailed their layoffs since the stimulus passed, Zandi warned they could be "too shell-shocked to resume hiring."

(Reporting by Lisa Lambert; Editing by Kenneth Barry)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.