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What American economic policy should be looking forward

Brad DeLong, professor of economics | September 3, 2010

Here is the last of my quotations from Class of 1957-Garff B. Wilson Professor of Economics Christina Romer’s final speech as a cabinet-rank member of the Obama administration, at the National Press Club on September 1, 2010:

This passage provides her recommendations for what American economic policy should be going forward.

Class of 1957-Garff B. Wilson Professor of Economics Christina D. Romer:

[The Administration’s] 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…. [T]he turnaround has been dramatic… 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 1⁄2 percent and employment by about 31⁄2 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 percen,… The reason that prediction was so far off is… [that while] our estimates of the impact of the Recovery Act have proven quite accurate… we… failed to anticipate just how violent the recession would be in the absence of policy…. [B]y June [2009], before the Recovery Act could have had much of an impact, it was 9 1⁄2 percent… our projection turned out to be wrong even before the Recovery Act had a chance to get off the ground, which is about as clear-cut evidence as one could imagine that the problem was in our assessment of the baseline, and not in the effects of the Act….

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 as troubled as it is despite aggressive action reflects the fact that this has not been a normal recession. Just as the downturn was uncharted territory, so is its recovery…. The Administration understood that the recovery would be difficult precisely because many of the usual drivers of growth were missing. That is why we included $266 billion of additional temporary recovery measures in our 2011 budget. Congress… has enacted substantially less than what the Administration proposed. As a result, the economy has not had all the additional support that it needed…. The Greek debt crisis and anemic growth in much of Europe contributed…. The result of these powerful headwinds and recent developments is that the United States still faces a substantial shortfall of aggregate demand…. 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…. Most actions… 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… if we can only find the will and the wisdom to use them….

I am proud of the recovery actions we have taken. I believe they have made the difference between a second Great Depression and a slow but genuine recovery…. But 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.