Romer on GDP
CEA Chief Christina Romer blogs on the GDP numbers:
After four consecutive quarters of decline, positive GDP growth is an encouraging sign that the U.S. economy is moving in the right direction. However, this welcome milestone is just another step, and we still have a long road to travel until the economy is fully recovered. The turnaround in crucial labor market indicators, such as employment and the unemployment rate, typically occurs after the turnaround in GDP. And it will take sustained, robust GDP growth to bring the unemployment rate down substantially. Such a decline in unemployment is, of course, what we are all working to achieve.
One of the things that makes American politics weird is that nobody in the administration is really supposed to talk about the fact that this is much more up to Ben Bernanke than it is up to Barack Obama. There’s disagreement as to whether expansionary monetary policy should be halted as soon as GDP starts growing or else should be continued until we have unemployment a few percentage points lower. This is a very important debate. But it’s a debate over which the country’s elected officials have extremely little formal influence.
32 Responses to “Romer on GDP”
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October 29th, 2009 at 10:16 am
But it’s a debate over which the country’s elected officials have extremely little formal influence.
What is “formal influence”? Obama doesn’t have much formal *power* outside of signing bills that legislate more sustained expansionary monetary policy (or maybe directing Geithner do disburse TARP money in ways that indirectly lead to more lending? ? ?). The Fed is supposed to be insulated from (informal) influence from the executive, but I don’t know what you mean by formal influence. Obama gives a speech from the Oval Office exhorting Bernanke to keep rates low? He writes a firm letter on official White House stationery?
October 29th, 2009 at 10:20 am
But it’s a debate over which the country’s elected officials have extremely little formal influence.
All indications are that the Fed and the Obama Administration are working very closely and cooperatively on dealing with these issues, whether the Fed is formally required to or not. So I think in this case an insistence on the formalities is actually a little misleading.
And incidentally, the Fed could certainly screw things up royally by prematurely tightening, but that doesn’t mean the Obama Administration has no role to play. Although there is probably not going to be one big second stimulus, we are going to get bits and pieces of stimulus in lots of smaller measures, and the Administration will play a role in all that. Consumer confidence is going to be crucial, and the Administration will play a role in that too. And so on.
Again, I think it is best to see the Administration and Fed as partners in all this, both by necessity and as they appear to be practicing.
October 29th, 2009 at 10:23 am
it’s a debate over which the country’s elected officials have extremely little formal influence.
And yet you often find it a litmus test for “seriousness” in center-left economic policy debates that monetary policy must be independent. Heck, leading up to 1997 Tony Blair and Gordon Brown made that a priority so that nice things were said about them in the august pages of the Economist and the Financial Times.
Obama gives a speech from the Oval Office exhorting Bernanke to keep rates low? He writes a firm letter on official White House stationery?
No, Barack Obama decides that the target overnight inter-bank lending rate for the next month will be X%.
October 29th, 2009 at 10:36 am
One of the things that makes American politics weird is that nobody in the administration is really supposed to talk about the fact that this is much more up to Ben Bernanke than it is up to Barack Obama.
It’s not even up to Bernanke. The world economy is a system that doesn’t follow the dictates of the political and banking class living in Wall Street and D.C. The last time the Fed decided to cut rates to the bone and hold them there to deal with an emergency we ended up with asset bubbles that drove the economy and the banking system into a crisis. So in a sense we’re right back where we were in 2001.
October 29th, 2009 at 10:37 am
[...] about Barack Obama as of October 29, 2009 Romer on GDP – yglesias.thinkprogress.org 10/29/2009 CEA Chief Christina Romer blogs on the GDP numbers : [...]
October 29th, 2009 at 10:42 am
This would be a much easier decision to make if we didn’t have so much debt left over from the massive deficits run during the economic expansionary periods of the Reagan and Bush the Lesser administrations.
October 29th, 2009 at 10:44 am
How about keeping interest rates low for a while to keep the economy expanding, and addressing the potential threat of inflation through tax policy? It’s not like we aren’t going to have bills to pay off over the course of the newly-begun Obama Boom.
October 29th, 2009 at 10:46 am
Christina Romer really should be running the Fed.
October 29th, 2009 at 10:48 am
This is a profoundly ill-informed statement. Monetary policy has shot its load. All we have left is fiscal policy. What makes American politics weird is that senators representing lobsters and cows have warped the fiscal response by reducing its magnitude and altering its composition in a way that devotes too much to tax rebates (through alternations in withholding). In so doing, they have blunted its stimulative effect. The weird thing about American politics is that we have a federal government that is so unrepresentative of humans.
October 29th, 2009 at 10:52 am
The Surf and Turf Coalition.
Hey, Mr. and Mrs. America, you know who’s squeezing job growth? You know who’s holding up health care reform?
The Surf and Turf Coalition.
October 29th, 2009 at 10:53 am
There’s disagreement as to whether expansionary monetary policy should be halted as soon as GDP starts growing or else should be continued until we have unemployment a few percentage points lower.
I think it should be noted that to the extent there are indeed people in the first camp (and lots of people may be just mouthing those arguments for other purposes), they currently aren’t near the actual levers of power.
How about keeping interest rates low for a while to keep the economy expanding, and addressing the potential threat of inflation through tax policy?
Tax increases right now would be a bad idea because they are anti-stimulative (tax cuts may not be the most efficient form of stimulus, but they are in fact on that side of the equation, and vice-versa for tax increases). But if you were clever, you might be able to come up with plans for future tax increases that would encourage additional consumption/investment right now.
October 29th, 2009 at 10:56 am
It’s not even up to Bernanke. The world economy is a system that doesn’t follow the dictates of the political and banking class living in Wall Street and D.C. The last time the Fed decided to cut rates to the bone and hold them there to deal with an emergency we ended up with asset bubbles that drove the economy and the banking system into a crisis. So in a sense we’re right back where we were in 2001.
It’s Thomas Freidman’s “Golden Straightjacket” or James Carville’s omnipotent bond market.
The trick is to not upset the gods yet still do what you feel needs to be done. Just give them a sacrificial virgin every now and then and they’ll be fine. The “markets” are just made up human beings anyhow.
October 29th, 2009 at 10:57 am
Uh, no. Both Bernanke and Romer are playing roles with the highest social return at the moment. Internally, wrt the Obama administration, the one who needs to go is Larry Summers. The person who should have been NEC chair is Robert Gordon. If you listen to this, you will understand why. Unfortunately, Obama understands so little about economics that he reflexively turned to Summers.
October 29th, 2009 at 10:58 am
DTM,
I wasn’t thinking about taxes as a stimulatory measure, but as a deflationary one – that is, taxes taking the place of rate hikes during the boom times. Another way to look at it is that we’re going to need taxes to be a bit higher than they’d otherwise be, in order to pay off all that debt, so the Fed will be able to keep interest rates lower than they otherwise would during those boom times, because taxation – ideally, highly-progressive taxation – will be doing some of the “cooling off” work we usually accomplish via Fed rates.
Am I just blathering, or does that make sense?
October 29th, 2009 at 10:59 am
I’d like to see Elizabeth Warren get a bump at some point.
She’s doing God’s work.
October 29th, 2009 at 11:01 am
Brilliant.
October 29th, 2009 at 11:19 am
It makes sense to me. It is the flipside of the Keynsian stimulus.
In normal times, you stimulate growth with rate cuts, and fight inflation with rate hikes.
When interest rate cuts can no longer be used to stimulate growth, government deficit spending is used. Afterward, when growth starts causing unwanted inflation, the first step to control it should be taxation to repay the stimulatory deficit spending. After that, you can go back to business as usual – controlling inflation/unemployment with rate adjustments.
October 29th, 2009 at 11:44 am
Am I just blathering, or does that make sense?
Using tax increases to retire debt certainly makes sense once you are back in an expansionary phase and are trying to suck money back out of the system anyway, and it is indeed part of the basic Keynesian program.
One caveat: Romer’s analysis suggests that there may be no anti-growth affect of such tax increases, and indeed they might be pro-growth. That strikes some people as counterintuitive, and I personally wonder if there might be a similarly counterintuitive affect on inflation rates.
October 29th, 2009 at 11:52 am
I am amazed no one has mentioned this: Central banker indepenence is an important FEATURE of the system. Without indepedence the central banks (this isn’t just a US institution) would be captive to the politician’s short term needs, rather than to the longterm interests of the society. Perhaps we all just know this so well that no one needs to remind us?
October 29th, 2009 at 11:56 am
De facto expansionary monetary policy for 22 years lead to stagnant income for the majority of American households, a deterioration of household balance sheets via the worst extended real estate decline since the 1840’s, the decline of the dollar, the unprecedented explosion of the Treasury liabilities and far more on the way, and the trashing of the Feds assets quality, among other bad things and not one good one. All these thing engendered by the Fed and their partners the financial elites and now the fix is up to Bernanke keeping ‘monetary policy’ loose? When does one realize that an intellectual dead end has been reached.
October 29th, 2009 at 12:02 pm
One of the things that makes American politics weird is that nobody in the administration is really supposed to talk about the fact that this is much more up to Ben Bernanke than it is up to Barack Obama.
This is true. However, the reappointment of Bernanke was up to Obama, and I have a sneaking suspicion that this subject came up during the interview. The President has absolute power over very few aspects of government policy, but he always has leverage. He will almost certainly have an easier time coordinating economic policy with the Fed than with the Senate Democratic Caucus, where much of his domestic policy agenda is going to be slowly strangled to death.
The Surf and Turf Coalition
Perfect.
October 29th, 2009 at 12:21 pm
Why is it so important? Obama and Bernanke clearly works well together. It’s a team effort and should be praised, not nitpicked.
October 29th, 2009 at 12:40 pm
Federal tax receipts for the past quarter were down, YOY June, July, August 5.6%, 7.3% and 19.6%. The last number includes quarterly corporate taxes, other months reflect mostly withholding’s. Octobers so far are down about 12% YOY.
Funny GDP growth there.
October 29th, 2009 at 12:47 pm
De facto expansionary monetary policy for 22 years lead to [bad things] . . . and now the fix is up to Bernanke keeping ‘monetary policy’ loose?
Yes, actually. In this area timing is everything, so it is true both that leaving monetary policy loose too long can lead to bad things, and that tightening monetary policy too soon can lead to bad things. At the moment, the risk of tightening too soon is far greater than the risk of tightening too late. But that hasn’t always been true in the recent past–the world is complicated in that way.
Incidentally, of course the prior bad things had other contributing causes from bad tax policies, bad expenditure policies, bad regulatory policies, and so on. I’m not saying the Fed was blameless, but lots of forces were conspiring to reach the result in question.
October 29th, 2009 at 1:11 pm
My post 22 should of course have said July, Aug. Sept.
DTM exhibits the conceptual dead end perfectly. It is the very idea that one man and one institution, the Fed Chairman and the Fed, can wisely control the economy through what is termed ‘monetary policy’. The demigod Greenspan who was credited with knowing all for 18 years has admitted his entire worldview and ideology were wrong, and yet we are to believe the new man has it right? Why?
I don’t want to go all Austrian here. Consider perhaps that money is not wealth. The money fetish or is it religion which posits just the right amount of more money, always more, will make things right is a sad illusion. We have become slaves to money. Literally 60% of Americans are now little more than slaves and it is understood that only the rich are really free. It’s sick.
October 29th, 2009 at 1:31 pm
One of the things that makes American politics weird is that nobody in the administration is really supposed to talk about the fact that this is much more up to Ben Bernanke than it is up to Barack Obama.
This is a starkly ignorant and unhelpful statement. It leads away from the correct solution.
Providing additional credit inflates asset prices (commodities and stocks), but it does nothing for incomes. Goldman-Sachs gets richer but Joe Sixpack doesn’t have a job.
The 1933-1937 recovery was driven by jobs programs, with the Fed quiescent. The “can’t push on a string” metaphor is still operative. The Fed can provide credit, but it can’t provide demand. For that, fiscal action is required, and that means the WH and congress must act.
October 29th, 2009 at 3:25 pm
DTM exhibits the conceptual dead end perfectly. It is the very idea that one man and one institution, the Fed Chairman and the Fed, can wisely control the economy through what is termed ‘monetary policy’.
Not only don’t I believe that, but my post made it very clear that I believe the opposite.
Providing additional credit inflates asset prices (commodities and stocks), but it does nothing for incomes.
Lots of real businesses that employ real people require credit to start, survive, and expand. So while unlocking the credit markets isn’t sufficient to get employment back on track, it is definitely necessary.
October 29th, 2009 at 3:26 pm
I’m continually amazed how often I hear arguments that assume that economic and fiscal policy should never change based on economic conditions.
To wit:
“This meltdown was caused by too-easy credit, and now in December 2008you’re complaining that there isn’t enough credit being extended?”
or
“You were complaining about Bush running deficits, and now in March 2009 you want Obama to run deficits?”
or
“You think Greenspan should have raised interest rates in 2003, but now in 2009 you want him to keep them low?”
It’s like being asked why I’m diving in the pool to save a drowning man, when I offered him a drink half an hour ago.
October 29th, 2009 at 5:33 pm
Paul Krugman: “Basically, we’d be lucky if growth at this rate brought unemployment down by half a percentage point per year. At this rate, we wouldn’t reach anything that feels like full employment until well into the second Palin administration.”
Kruger keeps his sense of humor while staring into the abyss. I like that. I admire that. I admire fearless men.
Look, Matt, Mighty Ben Bernanke shot his bolt. Bernanke can’t pull his main lever anymore, and lower interest rates. That lever is broken. So he is using his other lever, the working lever, to lend money to Wall Street and foreign banks (same thing) -to prop up a giant, collapsing Ponzi scheme at home and abroad.
And Wall Street Ponzi Banks are most definitely not using Gentle Ben’s money to lend it out to our beloved and vital small businessmen. How can they? They don’t know any! Instead, Wall Street is using Ben’s cash gifts to do what they do best, which is to gamble, pay themselves gentleman’s bonuses, and to prop each other up in an 8 way circle jerk.
http://www.zerohedge.com/sites/default/files/images/Circle%20Jerk.png
JAL went out of business today. Did you notice that? Japan’s main airline lost $1.8 billion in one quarter, which is hard to do, and now they must be saved by bailouts. And oil hasn’t spiked yet! When oil spikes, and it will, all the world’s airlines will get crushed. All of them. What do we do then? Call on Ben Bernanke to save us?
20 million American homes lay empty. The commercial real estate market is imploding. Unemployment, applying real measurements (1982 measurements), is, at minimum, 17%. We have no functioning banking system. American’s owe $1 trillion on their credit cards. The United States has $57 trillion in debt obligations. Etc.
Ben Bernanke can do nothing about this. It is no longer about banker’s pulling macro levers. In fact, it never was.
Now it comes down to preparation. The nation must prepare for the worst, and begin to fight, not bury its head. And only one man can help us do that, and that is Obama. He must do what he promised, and that is to tell us the truth -and lead.
October 29th, 2009 at 6:03 pm
It’s still a dead end. The amount of debt nationally and globally is far beyond any historic amount, by far. Far beyond the ability to pay back. Any systematic expansion of credit has a strong Ponzi element in that much of it is needed to pay off the old debt. That is why an oh so brief interruption in credit growth threatened to crash the entire system.
Everyone approaches this as if there is some happy ending with ponies available if just the right amount of credit, at low non market rates of course, is created. There is no happy ending here. The system is wildly unstable and the only thing keeping it going right now is the Treasuries ability to borrow $2 Trillion a year at low rates for the foreseeable future. Long enough we are to hope that all that crappy debt will become good again in a nice virtuous circle. You know, the trillions still sitting off the balance sheets of the banking giants and the trillion of mortgage paper now the predominant Fed asset. Just the right amount of new credit is going to do the trick we are told. Hell, maybe somebody might go back to work again so they can pay off their CC at 30% interest.
There is a logical dead end in here somewhere and it has to do with our relation to debt. Debt cannot continue to grow forever when there is already more than can be repaid. If borrowing or printing more money were the key to wealth then everything we have been by philosophers and even Christ is wrong.
October 29th, 2009 at 7:42 pm
Everyone approaches this as if there is some happy ending with ponies available if just the right amount of credit, at low non market rates of course, is created.
I’ve explicitly disclaimed that point of view above as well.
I don’t know who you are arguing with, but it isn’t me.
October 30th, 2009 at 9:01 am
[...] grew at a 3.5 percent annual rate between July and September 2009. This is the first quarter of positive GDP growth since the second quarter of [...]