The White House Depression Primer
Invited by a reporter Monday to criticize President Obama’s economic plans, the chair of the White House Council of Economic Advisers, Christina Romer, naturally brushed the question aside. “You want me to tell you what's wrong with the fiscal stimulus package?” she said. “SO not going to do that!" Too late! As it happens, the lecture Romer had just finished delivering at the Brookings Institute on Monday afternoon was criticism enough. An expert on the Great Depression, Romer organized her lecture around six lessons distilled from the era. The administration she serves seems to be disregarding every one of them. LESSON ONE: Romer warned that a small fiscal stimulus has only small effects. “While Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem,” she said. Roosevelt’s spending increased the deficit by only 1.5 percent of GDP in 1934. And Obama? His fiscal stimulus is certainly big—almost $800 billion, or “close to three percent of GDP in each of the next two years,” Romer said. But most of that money won’t be spent until 2010 or later, meaning it’s fairly modest right now, when we really need it. LESSON TWO: Romer argued that monetary expansion can be a powerful tool even when interest rates have reached zero. The Roosevelt administration reflated by taking the U.S. off the gold standard in 1933—and then (unintentionally) by issuing “gold certificates” against the European gold that flowed into the U.S. as war approached in the late 1930s. The Obama administration, by contrast, seems to have written off monetary policy as exhausted, and is betting everything on the power of its inadequate fiscal stimulus. Romer expressed her concerns on this matter delicately: “In thinking about the lessons from the Great Depression for today,” she said, “I want to tread very carefully. A key rule of my current job is that I do not comment on Federal Reserve policy. So, let me be very clear—I am not advocating going on a gold standard just so we can go off it again, or that Tim Geithner should start conducting rogue monetary policy. But the experience of the 1930s does suggest that monetary policy can continue to have an important role to play even when interest rates are low by affecting expectations, and in particular, by preventing expectations of deflation.”
Behind Romer’s delicate words is a question: Why does the Obama administration talk down the importance of monetary policy? The Federal Reserve still has weapons in its arsenal, including what's called "quantitative easing"—technical jargon for what amounts to printing more money and deliberately inflating. These measures are not only powerful, they are a lot easier to stop when they are no longer needed—unlike, say, the administration's big spending plans.
LESSON THREE: Romer warned against cutting back on stimulus too soon—the mistake that FDR made in 1937. That may sound like a justification for the slow-release Obama fiscal plan. But as Romer notes, FDR’s stimulus was not so much ended as it was counteracted, by the imposition of Social Security taxes in 1937, for example. In the same way, the Obama administration has already announced that upper-bracket income taxes will rise in 2011. More ominously, that’s likely the date at which the administration’s cap-and-trade plan will go into effect, sharply increasing energy costs.
Romer seems worried about this problem too: “We will need to monitor the economy closely to be sure that the private sector is back in the saddle before government takes away its crucial lifeline,” she said.
LESSON FOUR: Romer noted that financial recovery and real recovery go together. But not in this administration! The stimulus plan is already enacted. A huge omnibus spending bill is rolling to the finish line. And big budget increases in fiscal 2010 seem certain. Yet at best the Obama financial plan is still a work in progress. My colleague John Makin from the American Enterprise Institute offers a tougher description: the plan, he says, is “opaque, ad hoc and unsystematic.” LESSON FIVE: Romer urged that the recovery efforts must be global. Too bad, then, about this report in Tuesday’s Washington Post: “ Even as world trade takes its steepest drop in 80 years amid the global economic crisis, the administration is preparing to take a harder line with America's trading partners. It will seek new benchmarks before supporting already-written trade agreements with Colombia and South Korea and is suggesting that it will dig in its heels on global trade talks, demanding that other countries make broader concessions first.” LESSON SIX: Romer’s final lesson may be the least reassuring: Despite the chaos, loss of faith and lost wealth, the Great Depression, she said, “did eventually end.” So it did. And so did the dinosaurs. In the long run we are indeed all dead. In the short run, however, it would be nice not to be poor. In an administration that increasingly seems baffled by the financial crisis, a White House official who is willing to pierce the illusion of happy consensus can do a real service. We don’t need jolly, bogus reassurance. We need real thinking and a more open and productive debate. The administration’s top economist has now publicly, if elliptically, served notice of the likely inadequacy of the administration’s plans. Better to correct course early rather than too late!