Dr. Christina Romer’s economic speech today, marking her last speech as an administration official, is an admission that the fiscal stimulus package that she helped craft has failed.
Calling the economic recovery “insufficient”, she noted that a 0.6% drop in the unemployment rate still leaves unemployment unbearably high. “Real GDP is growing, but not fast enough to create the hundreds of thousands of jobs each month that we need to return employment to its pre-crisis levels,” she said.
The Obama administration’s fiscal stimulus was meant to boost aggregate demand and get the economy going again. Estimates of GDP show that the United States is still 6% under its pre-crash trend, and that her plan hasn’t worked as expected.
“The United States still faces a substantial shortfall in aggregate demand… this shortfall in demand, rather than structural changes in the composition of our output… is the fundamental cause of our continued high unemployment,” Romer told the crowd at the National Press Club in Washington, D.C.
Romer today called for a second round of fiscal stimulus to further boost aggregate demand, a tacit admission that her first round was a failure:
While we’d all like to find the inexpensive, magic bullet to our economic troubles, the truth is, it almost surely doesn’t exist. The only surefire way for policy makers to increase aggregate demand in the short-run is for the government to spend more and tax less. And in my view we should be moving forward on both fronts… the key is that we need to take action, and we need to do it quickly.
Somewhat paradoxically, Romer tried to defend the 2009 stimulus package, even as calls for a second round of stimulus is proof that the package was less successful than was predicted. Romer pointed out that large businesses are starting to be able to access the credit they need:
While credit remains tight for consumers and small businesses, lending standards have stopped tightening and are gradually starting to loosen, large firms are able to borrow at favorable rates and get the credit that they need for investment in day to day operations, and the financial industry has paid back the U.S. taxpayer at a rate few thought possible.
Many Republicans have criticized the Obama administration for painting a rosy picture of economic recovery, and Romer had herself predicted that the stimulus would prevent unemployment from rising above 8%.
Defending her projections, Romer argued that she correctly predicted the stimulus’ effect, but failed to accurately forecast how bad the economy would have been in the absence of the stimulus, also known as the baseline estimate:
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… we, like virtually every other forecaster, failed to anticipate 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.
Further, Romer asserted that the current recession represents an unprecedented problem, one that continues to puzzle economists to this day.
“To this day, economists don’t understand why firms cut production as much as they did, or why they cut labor so much more than they normally would,” said Romer. “The current recession has been fundamentally different from other post-war recessions… Rather than being caused by deliberate monetary actions, it began with interest rates at low levels… Precisely what has made it so terrifying, and so difficult to cure, is that we have been in largely uncharted territory.”
As Romer leaves the administration, she says that her only regret is that there is so much left to be done in order to ensure a stable economic recovery. “Policy-makers need to find the will to take the steps needed to finish the job and return the American economy to full health,” said Romer. “And no one should be blocking essential actions for partisan reasons.”
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