John B. Judis: How Obama's new economic advisor learns the wrong lessons from history
[John B. Judis is a senior editor at The New Republic and a visiting fellow at the Carnegie Endowment for International Peace.]
Barack Obama announced today that the chair of his Council of Economic Advisors will be Christina Romer, a professor at the University of California, Berkeley, and an expert on government fiscal and monetary policy. As Romer stood beside him at the press conference, Obama uncharacteristically stumbled over his words in introducing her. He seemed to be learning who she was as he spoke--and that may say more about the appointment than the actual words of praise he uttered.
Obama has been criticized for excluding progressive Democrats from his administration. I think that's nonsense. But in this case, Obama did appoint someone--whether wittingly or not--whose views on the economy appear to place her well to the right of mainstream Democratic economic opinion. I say they appear to do so, because my basis for saying this is not pronouncements that Romer has made on what to do now, but her theories about fiscal and monetary policy.
Start with her views on the Great Depression of the 1930s. The standard account has been that the U.S. economy began to revive from 1934 to 1937, when Franklin Roosevelt's government hiked public investment and ran budget deficits; that the recovery stalled in 1938 after Roosevelt erroneously put the breaks on the economy and tried to run a surplus; and that the country only recovered from the depression after that because the U.S. began running deficits again and because of growing war orders from abroad; and that the final recovery awaited the massive public defense investment in 1941 and 1942. Gross public investment increased 150 percent from 1940 to 1941, and that's when unemployment began to plummet.
Romer's view is that what ended the depression was an expansion in the monetary supply, due to the inflow of gold from abroad. "Fiscal policy, in contrast, contributed almost nothing to the recovery before 1942," Romer wrote in a 1991 paper for the National Bureau of Economic Research. That's a view that would lead one to emphasize monetary over fiscal fixes--that is, changes in the federal funds rate and money supply over increases in public investment and cuts in taxes. This policy perspective would seem to de-emphasize or even oppose the kind of massive public investments that Obama now seems to be considering. If so, Romer would be encouraging a strategy that has so far proved ineffective--Fed interest rates are approaching zero and the economy is continuing to crater--and rejecting a measure that might be effective.
In a paper delivered in September 2007, Romer addresses more directly recent government fiscal and monetary policy--but with the same implications. She contends that after World War II, the Truman and Eisenhower administrations developed a "modern" fiscal and monetary policy that was remarkably successful. It stressed a commitment to budget surpluses to prevent inflation and the use of deficits only in the extremity of a recession. During the Kennedy and Johnson years, Romer argues, the U.S. abandoned this approach for one that sought to maintain low unemployment (a four-percent target) through, if necessary, persistent budget deficits. Romer contends that the '60s model led to the high inflation and unemployment of the '70s....
Read entire article at New Republic
Barack Obama announced today that the chair of his Council of Economic Advisors will be Christina Romer, a professor at the University of California, Berkeley, and an expert on government fiscal and monetary policy. As Romer stood beside him at the press conference, Obama uncharacteristically stumbled over his words in introducing her. He seemed to be learning who she was as he spoke--and that may say more about the appointment than the actual words of praise he uttered.
Obama has been criticized for excluding progressive Democrats from his administration. I think that's nonsense. But in this case, Obama did appoint someone--whether wittingly or not--whose views on the economy appear to place her well to the right of mainstream Democratic economic opinion. I say they appear to do so, because my basis for saying this is not pronouncements that Romer has made on what to do now, but her theories about fiscal and monetary policy.
Start with her views on the Great Depression of the 1930s. The standard account has been that the U.S. economy began to revive from 1934 to 1937, when Franklin Roosevelt's government hiked public investment and ran budget deficits; that the recovery stalled in 1938 after Roosevelt erroneously put the breaks on the economy and tried to run a surplus; and that the country only recovered from the depression after that because the U.S. began running deficits again and because of growing war orders from abroad; and that the final recovery awaited the massive public defense investment in 1941 and 1942. Gross public investment increased 150 percent from 1940 to 1941, and that's when unemployment began to plummet.
Romer's view is that what ended the depression was an expansion in the monetary supply, due to the inflow of gold from abroad. "Fiscal policy, in contrast, contributed almost nothing to the recovery before 1942," Romer wrote in a 1991 paper for the National Bureau of Economic Research. That's a view that would lead one to emphasize monetary over fiscal fixes--that is, changes in the federal funds rate and money supply over increases in public investment and cuts in taxes. This policy perspective would seem to de-emphasize or even oppose the kind of massive public investments that Obama now seems to be considering. If so, Romer would be encouraging a strategy that has so far proved ineffective--Fed interest rates are approaching zero and the economy is continuing to crater--and rejecting a measure that might be effective.
In a paper delivered in September 2007, Romer addresses more directly recent government fiscal and monetary policy--but with the same implications. She contends that after World War II, the Truman and Eisenhower administrations developed a "modern" fiscal and monetary policy that was remarkably successful. It stressed a commitment to budget surpluses to prevent inflation and the use of deficits only in the extremity of a recession. During the Kennedy and Johnson years, Romer argues, the U.S. abandoned this approach for one that sought to maintain low unemployment (a four-percent target) through, if necessary, persistent budget deficits. Romer contends that the '60s model led to the high inflation and unemployment of the '70s....