Christina Romer's Farewell Address
Below, Brad DeLong summarizes the key parts of Christina Romer's farewell speech. A nice going away present would be another stimulus package, but that's not going to happen.
It's frustrating. We are putting pressure on the Fed to engage in quantitative easing and other measures in the hope that this will lower long term real interest rates a bit. There's not a lot of room for them to fall, but there's some room and recent work suggests the Fed has the power to make this happen.
Once interest rates fall by however much, we then hope firms will be induced to invest more in new plants and equipment (because it's now slightly cheaper), and we hope that consumers will increase their consumption of durable goods.
What's frustrating is that an investment tax credit or some other tax inducement could provide the same incentive to invest as a fall in long-term rates, and, though we may want to think about the wisdom of encouraging household debt, other tax changes could induce consumers to purchase durable goods (e.g. allow them to write-off all interest, though that probably isn't the best way to do this). Fiscal policy can accomplish the same task monetary policy hopes to achieve, and do so much more directly. You don't have to hope that interest rates fall so as to create an incentive to invest, the tax credit makes the incentive certain, and the incentive can be larger because it's not limited by the small amount interest rates can fall.
Yet we have so little faith in Congress that we choose to pressure the Fed where at least there's some hope of action rather than Congress where it is clear that such effort would be wasted. The Fed can't do it alone even if it does act, and Congress needs to step up and do more for the economy. But, as noted above, that's unlikely to happen and it's too bad that Christina is not going to get the going away present that she -- and more importantly the economy -- deserve.
Here's a summary of Brad DeLong's summary of Christie Romer's speech:
Christie Romer: The Only Surefire Way for Policymakers to Substantially Increase Aggregate Demand in the Short Run Is for the Government to Spend More and Tax Less. by Brad DeLong: Christina D. Romer says goodbye to Washington:Not My Father's Recession: The Extraordinary Challenges and Policy Responses of the First Twenty Months of the Obama Administration: The first recession I really remember was that in 1981-82. ... That recession was personal. My father lost his job at a chemical plant in the spring of 1983, shortly after the trough of the recession. ... Soon after, my father found a less well-paying but very stable job. By Christmas, our family's economic health was almost fully restored.1981-82 was a terrible recession, but it was a recession economists understood. Like many other postwar recessions, it was started by the difficult decision by monetary policymakers to raise interest rates to bring inflation down. The suffering of ordinary families like my own was real and costly. But once inflation had been reduced and the Federal Reserve lowered interest rates, [the economy] came surging back. ...
The current recession has been fundamentally different from other postwar recessions. This is not my father's recession. Rather than being caused by deliberate monetary policy actions, it began with interest rates at low levels. It is a recession born of regulatory failures and unsound practices that contributed to a housing bubble and eventually a full-fledged financial crisis. Precisely what has made it so terrifying and so difficult to cure is that we have been in largely uncharted territory. An all-out financial meltdown in the world's largest economy and the center of the world's financial system is something the world has experienced only once in the past century -- in the 1930s. Thus, the President took office in the midst of a recession of historic proportions, but for which history provided little guidance....
Had the Federal Reserve not responded as rapidly and creatively as it did, the crisis would have been catastrophic. As it was, it was as severe as anything we have experienced since the Great Depression.
Though it was clear that the strain on our financial markets was intense, what was not clear at the time was how quickly and strongly the financial crisis would affect the economy. Precisely because such severe financial shocks have been rare, there were no reliable estimates of the likely impact. To this day, economists don't fully understand why firms cut production as much as they did... The other development that few anticipated was the degree to which the recession would be worldwide....
The American Recovery and Reinvestment Act was passed less than a month after the inauguration. The legislation was large, well diversified, temporary, and fast-acting. ... Because the final bill was a mixture of hundreds of measures, many of which don't come with Recovery Act signs or easily identifiable links to the Act, it has been hard for people to see what the Act has done. But it is precisely because it works through existing programs and spreads funds widely that it could get out quickly and reap large benefits....
Our policies for financial stabilization were similarly pragmatic. One of the first things the President-Elect did was work behind the scenes to ensure that Congress did not block the release of the second tranche of TARP funds. By December 2008, TARP and keeping financial institutions from collapsing were already deeply unpopular. But the President-Elect understood that it was irresponsible to be standing at the edge of a cliff without the safety net that the additional funds would provide.... The Financial Stability Plan was forged over the next few months. ... The stress test formed the centerpiece of the response. ...
These unprecedented, pragmatic policy actions have made an enormous difference. On the financial side, the stress test reassured investors and set off a wave of private capital-raising that was exactly what the system needed. ... And the financial industry has paid back U.S. taxpayers at a rate few thought possible....
For the real economy, the turnaround has been dramatic. Real GDP went from falling at an annual rate of nearly 6 percent at the end of 2008 and the beginning of 2009 to growing steadily over the past four quarters. ...
But compared with the problems we face, the turnaround has been insufficient....
In a report that Jared Bernstein and I issued during the transition, we estimated that by the end of 2010, a stimulus package like the Recovery Act would raise real GDP by about 3 1â?„2 percent and employment by about 31â?„2 million jobs, relative to what otherwise would have occurred. As the Council of Economic Advisers has documented in a series of reports to Congress, there is widespread agreement that the Act is broadly on track to meet these milestones.... What the Act hasn't done is prevent unemployment from going above 8 percent, something else that Jared and I projected it would do. The reason that prediction was so far off is implicit in much of what I have been saying this afternoon. An estimate of what the economy will look like if a policy is adopted contains two components: a forecast of what would happen in the absence of the policy, and an estimate of the effect of the policy. As I've described, our estimates of the impact of the Recovery Act have proven quite accurate. But we, like virtually every other forecaster, failed to anticipate just how violent the recession would be in the absence of policy, and the degree to which the usual relationship between GDP and unemployment would break down. ...
The thing I do regret is that there is still so much unfinished business. I would give anything if unemployment really were down to 8 percent or lower.... That the economy remains ... troubled ...
The ... United States still faces a substantial shortfall of aggregate demand. GDP by most estimates is still about 6 percent below trend. This shortfall in demand, rather than structural changes in the composition of our output or a mismatch between worker skills and jobs, is the fundamental cause of our continued high unemployment....
The pressing question, then, is what can be done to increase demand and bring unemployment down more quickly. ...
The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts....
Given our long-run fiscal challenges, any additional support should be done in a responsible way. It makes sense to view some temporary support as emergency measures. Most actions, however, should be paid for over time with future spending cuts or appropriate future revenues. But concern about the deficit cannot be an excuse for leaving unemployed workers to suffer. We have tools that would bring unemployment down without worsening our long-run fiscal outlook, if we can only find the will and the wisdom to use them....
I desperately hope that policymakers on both sides of the aisle will find a way to finish the job of economic recovery. We have already navigated through miles of difficult, uncharted waters. Surely we can go the rest of the way. The American people deserve nothing less.
