Christina Romer’s case for the American Jobs Act is unquestionably worth your time, and does a great job of taking on objections from both the left and the right. In particular, her argument that “that fiscal stimulus will be more cost effective at speeding deleveraging and recovery” than measures that directly tackle debt as such is important as is her criticism that relative to an optimal plan the Obama initiative “may be too tilted toward broad tax cuts, when bigger increases in government investment spending and more targeted tax cuts would promote faster growth.” In defense of Obama’s view, I think fairness considerations point in favor of broad-based relief rather than targeted initiatives.

It’s worth again emphasizing the extent to which a coordinated fiscal/monetary effort could address these problems if all the relevant players wanted to.

In a world where Congress, the executive branch, and the Federal Reserve all wanted to work together the Treasury could sell $300 billion worth of bonds to the Fed. It could then mail $1,000 checks to every American. The Fed could then light the bonds on fire. It is impossible for me to understand how such an operation could fail to increase spending or speed debt-deleveraging. You would want to accompany this with an explanation of what’s going on. A statement that says “we’re going to keep doing this until unemployment falls below X% or inflation goes above Y% so alter your plans accordingly.” This will not solve all our problems, but it would solve some of them and would let us focus attention on things like health care costs, trade balances, etc. that are harder to deal with.

In her goodbye speech as Council on Economic Advisors Chair, Christina Romer came out swinging (PDF) with calls for fiscal policy to support growth and employment:

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.

The measures should be chosen carefully so that they have the highest bang for
the buck possible. The state fiscal relief to prevent teacher layoffs that was just passed is an excellent measure. The small business tax cut and lending bill is also likely to have excellent job creation effects and should be passed. As the President said in his Rose Garden remarks on Monday, there are a range of other sensible measures that deserve consideration, such as tax cuts for struggling middle class families and businesses willing to invest in the United States, and much needed investments in infrastructure. The key is that we need to take action and we need to do it quickly.

Like a lot of people I sometimes fall into the trap of devoting almost exclusive attention to the presidential administration to the exclusion of other actors. But the truth is that whatever the failings of the White House’s approach to fiscal policy, they have been out there consistently pushing for somewhat more to be done. The really staggering thing, from the beginning, has been the unwillingness of congress to pony up.

The Council on Economic Advisors chair does a Q&A with the Wall Street Journal:

What can be done to make things better?

Romer: There’s a lot that can be done. We had in our budget $267 billion of temporary recovery measures. So far, by kicking and screaming, we have only gotten a fraction of that.
I think the additional state fiscal relief is absolutely essential. The FMAP extension. The $10 billion fund for preventing teacher layoffs. If you look at what’s happening at the state and local level, that’s a clear headwind to the recovery. Anything you can do to help ease that problem would be incredibly beneficial. We are working incredibly hard to get more credit and additional tax cuts for small businesses. And, the President has been talking about the Homestar program. There have been all these good ideas and what’s been frustrating for me is it’s been such a struggle to move them forward.

All true. I just wish she would mention monetary policy. Ultimately what’s needed is a whole of government effort to raise the price level back to something commensurate with pre-crisis trends. I understand the theory that it’s better for central banks to be operationally independent of elected officials (though the theory looks worse and worse with every passing day) but the convention that elected officials shouldn’t comment on central banking issues doesn’t make sense. You can’t talk about the economy without talking about monetary policy, and clearly we wouldn’t have a CEA Chair if she wasn’t supposed to talk about the economy.

I’ve seen a fair amount of commentary on the part of Ryan Lizza’s profile of the Obama economic team where Christina Romer recommends a $1.2 trillion stimulus proposal and they wind up with just a bit more than half of that out of deference to the tender sensibilities of the United States Senate. I’ve seen less commentary on this other part, where basically the same thing happen on financial system policy:

Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, “The one thing that was absolutely clear was, we were not in a position to go back to Congress.”

Axelrod’s argument seems absolutely sound. And Rahm Emannuel’s argument on the stimulus that congress wouldn’t appropriate $1.2 trillion also seems absolutely sound. But of course Romer’s arguments weren’t arguments about feasible legislative strategies. Of all the senior members of the Obama administration, Romer has by far the least experience with practical legislative politics and also has the job that’s the least concerned with practical legislative politics. And I think that it was in a lot of ways a masterstroke to appoint a very policy-focused academic with no practical legislative experience to the CEA job. When people work too long in Washington, their notions of what would be good policy in principle tend to become unduly corrupted by their knowledge of what’s possible in practice.

But what Lizza is telling us is that on the two biggest pieces of macroeconomic management, the Obama administration is pursuing policies that its in-house expert on macroeconomic crisis management believed were far too timid. He’s also telling us that this was done primarily not because people disagreed with her analysis, but because they felt it wasn’t possible, legislatively speaking, to do what was objectively necessary. It’s a bit of a scary situation.

If you’re interested in a less political and more technical defense of the American Recovery and Reinvestment Act’s likely efficacy, you could do worse than to start by reading this speech from CEA Chair Christina Romer (via Mark Thoma). Something of a myth sprung up to the effect that the Obama team’s economic policy ran contrary to her research findings.

That would have reflected an odd decision-making process in the White House if true. But it’s not true. As she explains, her research, at least, indicates that conventional studies have been underestimating the likely efficacy of this sort of stimulus measure.

David Henderson has a column in Forbes getting some pick up in what passes for conservative movement policy circles alleging that Christina Romer’s co-authored paper on “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks” debunks Barack Obama’s approach to fiscal stimulus.

Curiously, in the course of making the argument Henderson notes a few things that I would consider to cut against his argument. For one thing, Romer has been designated to serve as the Chair of Barack Obama’s Council of Economic Advisers which either makes the situation ironic (Henderson’s view) or else makes Henderson mistaken. For another thing, conservative economist Greg Mankiw doesn’t agree with Henderson’s interpretation. And for another other thing, conservative economic Larry Lindsay doesn’t agree with Henderson’s interpretation. But none of this gives Henderson pause. Instead, he confidently opines that they’ve all got the paper wrong.

I’m going to go with the other interpretation: Henderson is wrong.

He writes “The Romers carefully sift through all federal tax cuts and tax increases from 1947 to 2005 to figure out, based on the discussion at the time, whether the changes in tax policy were motivated by a desire to offset the business cycle or by other goals.” Their finding was that tax cuts implemented between 1947 and 2005 that were intended to serve as economic stimulus didn’t work. Henderson takes this to mean that the whole idea of fiscal stimulus is discredited and Obama is being foolish. A more reasonable way to look at the situation is that Obama and his team, like most economists, thinks that under ordinary circumstances recession-fighting should be done through the federal government’s “automatic stabilizers” and through the monetary policy actions of the Fed. But under rare circumstances—circumstances that everyone agrees never arose between 1947 and 2005—the Fed has already lowered interest rates to zero and the economy is still weak. That was the situation during the Depression, it was the situation during Japan’s “Lost Decade,” and it’s the situation today. But it never happened during the time period the Romers were looking at.

I’d like to echo Kevin Drum’s questions about incoming CEA Chair Christina Romer’s paper on “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks”.