Christina Romer Talks to Ezra Klein
Romer:
Ezra Klein's Weblog: 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....
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....
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....
[Alan Greenspan] is wrong about today and he’s wrong about the 1930s.... Milton Friedman explained... that financial institutions that have been through a terrible financial crisis tend to be quite cautious. Greesnpan could put that at his own doorstep.... That’s why [our banks and companies] 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....
If people do think we’re out of control of our budget, that surely can’t be good for [private] investment. But how do we show we’re in control?... [Cutting] $61 billion [out of this year's budget] won’t do anything [to solve the long-run problem], 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...
I would put it more strongly: Republicans do not want to reduce even the short-term deficit; they want to cut non-security discretionary spending, extend the high-income tax rate reductions, and repeal the Affordable Care Act. Taken together, those do not reduce but rather increase the deficit.
