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Government stimulus moves may have ended recession, study finds

Study by Fitch Ratings finds that bailouts and stimulus package boosted the U.S. economy, but also produced negative consequences.

May 03, 2012|By Jim Puzzanghera, Los Angeles Times

WASHINGTON — Without the unprecedented stimulus actions by the federal government triggered by the 2008 financial crisis, the Great Recession might still be going on, according to a study by Fitch Ratings.

Those incentives, however, came with a price: accelerated budget deficits and rock-bottom interest rates that hurt savers, according to the credit rating company.

Still, the $700-billion bailout fund, the $831-billion stimulus package and the Federal Reserve's near-zero interest rates, among other federal efforts, continue to spur the nation's economy, the study released Wednesday concludes.

The boost from those policies helped the nation's gross domestic product increase 3% in 2010 and 1.7% last year; absent the stimulus, the U.S. "might still be mired in a recession," according to the study, done in conjunction with Oxford Economics.

The U.S. economy would have seen little or no growth the last two years without the policies, the report says, and those actions appear "to have significantly softened the severity of the decline" in GDP in the year immediately after the recession ended in mid-2009.

Though the Fed's monetary policy actions were helpful, fiscal stimulus by Congress and the White House "had the strongest positive impact on consumption during the recent recovery," the study found.

The conclusions mirror findings in February by the Congressional Budget Office and a 2010 study by economists Mark Zandi and Alan Blinder about the positive economic effects of the $831-billion stimulus package, officially called the American Recovery and Reinvestment Act.

Republicans have been highly critical of the package, a mix of tax cuts and government spending that they said wasted taxpayer money.

They have noted that the stimulus did not keep the unemployment rate from going above 8%, the level that Obama administration officials predicted it would not surpass. Instead, unemployment rose to 10% in October 2009 and has remained above 8% since then.

The Fitch analysis looked more broadly at all federal stimulus policies, such as the Fed's large-scale asset purchases. And though the study said the stimulus policies "appeared to have achieved their intended effect," it warned that the actions came with negative consequences.

"The very high deficits of the last few years have led to unprecedented levels of government indebtedness, which will weigh on the federal government for years and require contraction in spending," the report says.

"Furthermore, while low rates clearly benefit borrowers, at the same time, they hurt savers," it says.

The government's huge budget deficits increase the pressure on policymakers to wind down the stimulus actions, the report says.

The deficits and the inability of the administration and lawmakers to make deep enough cuts in a deal last summer to raise the debt ceiling led Standard & Poor's Financial Services to downgrade the U.S. credit rating.

Fitch also has been concerned about soaring U.S. government debt, but it reaffirmed its AAA credit rating for the U.S. in August in the wake of the debt-ceiling deal.

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