Christina Romer served as the chair of the President’s Council of Economic Advisers from 2009 to 2010. She’s been back in the news recently arguing for a proposition that many find confusing: Washington, she says, needs to get serious about both stimulus and deficit reduction. We spoke earlier this afternoon, and a lightly edited transcript of our conversation follows.
Ezra Klein: You said recently that 8.9 percent unemployment is a crisis and that we have tools we can use, and it’s “shameful” we’re not using them. What are those tools?
Christina Romer: I’d start with what the president talked about in the State of the Union, which is more public investment. He didn’t propose anything very bold, but another $50 billion of infrastructure spending would help. More funding for education programs and research and development tax credits and basic scientific research would be good, too. I would offer more state and local aid. Going further, we cut 2 percent off the payroll tax on the employee side in December and we could’ve done another 2 percent off the employer side. An economist will tell you it doesn’t matter if you cut the employee side or employer side, but in the short run, it doesn’t all come out in the wash. Making labor less expensive helps firms hire people.
Some people argue, though, that the unemployment we’re seeing is no longer about demand and is now about mismatched skills. If that’s the case, then these policies wouldn’t do much.
There’s this debate going on over what the source of the unemployment is: Do we not have enough aggregate demand, or is it structural? What frustrates me is the advocates of the structural theory go from saying it’s hard to turn construction workers into nurses to saying we should do nothing. If you think our problem is structural, there are things we should be doing: money for training, or helping people get out of their mortgages, or massive investment in Detroit. I don’t believe that skills are the problem here, but if that’s your point of view, there’s still a lot we can do. Saying it’s structural is not the same as saying it’s not our problem.
You’ve also criticized the Federal Reserve for not doing more. What would you like to see them doing?
I’m teaching a course this semester on macro policy from the Depression to today. One thing I had the class read was Ben Bernanke’s 2002 paper on self-induced paralysis in Japan and all the things they should’ve been doing. My reaction to it was, ‘I wish Ben would read this again.’ It was a shame to do a round of quantitative easing and put a number on it. Why not just do it until it helped the economy? That’s how you get the real expectations effect. So I would’ve made the quantitative easing bigger. If you look at the Fed futures market, people are expecting them to raise interest rates sooner than I think the Fed is likely to raise them. So I think something is going wrong with their communications policy. They could say we’re not going to raise the rate until X date. Those would be two concrete things that wouldn’t be difficult for them to do. More radically, they could go to a price-level target, which would allow inflation to be higher than the target for a few years in order to compensate for the past few years, when it’s been lower than the target.
Alan Greenspan recently published a paper (pdf) arguing that our high unemployment is the result of corporations choosing to sit on their cash, and that “a minimum of half and possibly as much as three-fourths” of why corporations are choosing to sit on their cash “can be explained by ... the surge in government activism.” He says his argument is “buttressed by comparison with similar conundrums experienced during the 1930s,” and he concludes that “current government activism is hampering what should be a broad-based robust economic recovery.” What do you think of that argument?
He’s wrong about today and he’s wrong about the 1930s. What Milton Friedman explained about the 1930s is that financial institutions that have been through a terrible financial crisis tend to be quite cautious. Greesnpan could put that at his own doorstep: Letting a bubble build up and then having a meltdown in your system is what makes corporations and financial institutions gun-shy. That’s why they want to sit on huge piles of cash. It’s not because we had the audacity to strengthen some regulations, much less because we had the audacity to bail out the financial sector and have a huge fiscal stimulus.
The other criticism you frequently hear is that we’re simply broke, and thus we can’t afford to do more stimulus. You co-signed a statement with nine other past chairs of the Council of Economic Advisers calling for more deficit reduction, so how does that fit with your advocacy for more stimulus?
You care about the deficit because it allows you to do things you need to do to help people who are suffering.That’s the whole reason why I wish everybody would embrace the fiscal commission. If people do think we’re out of control of our budget, that surely can’t be good for investment. But how do we show we’re in control? House Republicans say it’s by cutting $61 billion out of this year’s budget. A more sensible view is that $61 billion won’t do anything, so why would anyone be reassured by that? The more sensible thing is we should have a package for short-term stimulus that also includes concrete policies that deal with the deficit, which means entitlements and taxes and defense spending and everything else.
There’s a joke in economics about the drunk who loses his keys in the street but only looks for them under the lightposts. When asked why, he says, ‘because that’s where the light is.’ That’s the problem with the deficit. Republicans want to bite off this little piece that they know how to deal with, not the broader problem, the one began long before this recession, that is much harder to deal with. The other thing with the Republicans is that their framework seems to be that you can’t increase spending on anything if you’re trying to move toward cuts in general. That’s odd. The idea we’ve got it just right and can’t rearrange spending doesn’t make any sense. We should be rearranging spending at the same time we’re dialing it down.