Matt Yglesias

Christina Romer vs Political Reality

I’ve seen a fair amount of commentary on the part of Ryan Lizza’s profile of the Obama economic team where Christina Romer recommends a $1.2 trillion stimulus proposal and they wind up with just a bit more than half of that out of deference to the tender sensibilities of the United States Senate. I’ve seen less commentary on this other part, where basically the same thing happen on financial system policy:

Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, “The one thing that was absolutely clear was, we were not in a position to go back to Congress.”

Axelrod’s argument seems absolutely sound. And Rahm Emannuel’s argument on the stimulus that congress wouldn’t appropriate $1.2 trillion also seems absolutely sound. But of course Romer’s arguments weren’t arguments about feasible legislative strategies. Of all the senior members of the Obama administration, Romer has by far the least experience with practical legislative politics and also has the job that’s the least concerned with practical legislative politics. And I think that it was in a lot of ways a masterstroke to appoint a very policy-focused academic with no practical legislative experience to the CEA job. When people work too long in Washington, their notions of what would be good policy in principle tend to become unduly corrupted by their knowledge of what’s possible in practice.

But what Lizza is telling us is that on the two biggest pieces of macroeconomic management, the Obama administration is pursuing policies that its in-house expert on macroeconomic crisis management believed were far too timid. He’s also telling us that this was done primarily not because people disagreed with her analysis, but because they felt it wasn’t possible, legislatively speaking, to do what was objectively necessary. It’s a bit of a scary situation.

Christina Romer on ARRA

If you’re interested in a less political and more technical defense of the American Recovery and Reinvestment Act’s likely efficacy, you could do worse than to start by reading this speech from CEA Chair Christina Romer (via Mark Thoma). Something of a myth sprung up to the effect that the Obama team’s economic policy ran contrary to her research findings.

That would have reflected an odd decision-making process in the White House if true. But it’s not true. As she explains, her research, at least, indicates that conventional studies have been underestimating the likely efficacy of this sort of stimulus measure.

David Henderson Versus the World

David Henderson has a column in Forbes getting some pick up in what passes for conservative movement policy circles alleging that Christina Romer’s co-authored paper on “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks” debunks Barack Obama’s approach to fiscal stimulus.

Curiously, in the course of making the argument Henderson notes a few things that I would consider to cut against his argument. For one thing, Romer has been designated to serve as the Chair of Barack Obama’s Council of Economic Advisers which either makes the situation ironic (Henderson’s view) or else makes Henderson mistaken. For another thing, conservative economist Greg Mankiw doesn’t agree with Henderson’s interpretation. And for another other thing, conservative economic Larry Lindsay doesn’t agree with Henderson’s interpretation. But none of this gives Henderson pause. Instead, he confidently opines that they’ve all got the paper wrong.

I’m going to go with the other interpretation: Henderson is wrong.

He writes “The Romers carefully sift through all federal tax cuts and tax increases from 1947 to 2005 to figure out, based on the discussion at the time, whether the changes in tax policy were motivated by a desire to offset the business cycle or by other goals.” Their finding was that tax cuts implemented between 1947 and 2005 that were intended to serve as economic stimulus didn’t work. Henderson takes this to mean that the whole idea of fiscal stimulus is discredited and Obama is being foolish. A more reasonable way to look at the situation is that Obama and his team, like most economists, thinks that under ordinary circumstances recession-fighting should be done through the federal government’s “automatic stabilizers” and through the monetary policy actions of the Fed. But under rare circumstances—circumstances that everyone agrees never arose between 1947 and 2005—the Fed has already lowered interest rates to zero and the economy is still weak. That was the situation during the Depression, it was the situation during Japan’s “Lost Decade,” and it’s the situation today. But it never happened during the time period the Romers were looking at.