Christina Romer: My Plan Failed (Outgoing Obama Economic Adviser Admits Fiscal Stimulus Failed)

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.”

What illogical thinking!!

Where in the world can Romer point to a society which has used the tyrannical and coercive power of government to "take" the fruits of the people's labors, borrow what they could not "take," and then produce prosperity and wealth for the people or the nation?

She cannot, of course. What she and her fellows ignore the history of civilization and embrace economic philosophy more akin to Mao, Marx and Lenin.

Adam Smith, the great moral philosopher, examined "The Nature and Causes of the Wealth of Nations," and his conclusions were and are consistent with American liberty, opportunity, and prosperity. Such conclusions were in perfect harmony with the Founders' philosophy and constitutional restrictions on coercive government power.

Those ideas enabled individuals to transform a wilderness into the greatest place of freedom, opportunity, and prosperty which ever existed.

Tyrants use the opposite idea to enslave individuals and nations.

Another take on Christina Romer :

http://hotair.com/archives/2010/09/02/romer-we-had-no-clue-and-still-dont/

By Ed Morrisey

Christina Romer exits the administration this month, and perhaps she felt compelled to engage in a little truth telling. If so, that may have been a little more truth than the people at the National Press Club, who had gathered to hear her valediction as chair of the White House Council of Economic Advisers, had prepared themselves to handle. Dana Milbank describes how depressing it was to the gathered media to have someone on the inside of the Obama administration tell them that the emperor and his staff have no clothes when it comes to the economy:

She had no idea how bad the economic collapse would be. She still doesn’t understand exactly why it was so bad. The response to the collapse was inadequate. And she doesn’t have much of an idea about how to fix things.

“What she did have was a binder full of scary descriptions and warnings, offered with a perma-smile and singsong delivery: “Terrible recession. . . . Incredibly searing. . . . Dramatically below trend. . . . Suffering terribly. . . . Risk of making high unemployment permanent. . . . Economic nightmare.”
Anybody want dessert?”

Just how bad was it? Romer admitted that no one at the White House understood the fundamentals of this recession, and how they just assumed it would behave like previous recessions. And it might have done so, had the Obama administration applied the policies that alleviated previous recessions, especially those that Ronald Reagan used to pull the US out of a decade-long stagnation slump where high inflation eroded the buying power of Americans. Instead of cutting taxes (especially capital gains taxes) and reducing regulation to entice new investment, Barack Obama and Congressional Democrats chose to chase a government takeover of health care, a massive tax on energy production that would penalize expansion and growth, and expanding the jurisdiction on Wall Street of the same agencies that had watched the collapse come and did nothing about it.

Romer, however, still hasn’t got a clue why a one-time expenditure of government funds didn’t make things hunky-dory:

“Even now, Romer said, mystery persists. “To this day, economists don’t fully understand why firms cut production as much as they did or why they cut labor so much more than they normally would.” Her defense was that “almost all analysts were surprised by the violent reaction.”

“Almost all analysts”? Only those who work in the White House. No one doubts the magnitude of the recession, but that’s only part of the story today, and a rapidly diminishing part at that. The wealth that got destroyed in the bubble collapse has already gone, but there is still plenty of capital left to get the engine of wealth creation primed and pumping again. The “violent reaction” came to the radical Democratic agenda of government expansion and massive deficits, which is why the normal post-World War II pattern of recovery hasn’t appeared in this instance, and most likely won’t until a new Congress arrives to force the administration into a different, pro-growth direction.
Romer bristles at the perception that she and Obama miscalculated the response, but as Milbank notes, her defense is rather pathetic. Why, she performed quantitative estimates!

“No wonder most Americans think the effort failed. But Romer argued, a bit too defensively, against the majority perception. “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,” she declared. Further, she argued, “I will never regret trying to put analysis and quantitative estimates behind our policy recommendations.”

But the problem is not that Romer did a quantitative analysis; the problem is that the quantitative analysis was wrong. Inevitably, this meant that, as she acknowledged, “the turnaround has been insufficient.”
And it’s not just that, either; it’s also that the White House ignored a long track record of the successful and unsuccessful strategies in dealing with recessions over the last several decades. When Keynesianism has been tried, it has failed and instead ushered in stagnation and economic drift. When tax cuts and streamlining have been implemented, expansion and job growth followed. This administration somehow believed it could reinvent economics so that it performed just like it does in the laboratories of the Ivory Tower, where their top-down, command-economy projects always succeed. As Romer admits, to the consternation of the media that failed to vet Barack Obama and his policies as a candidate, is that no one in the White House has a Plan B.

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