Arnold Kling  

Christina Romer vs. Bloggers

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The CEA Chairwoman does not take on anyone by name, but She writes,


in my view the overwhelming weight of the evidence is that the current very high -- and very disturbing -- levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis.

In other words, no Recalculation here. Move along. But if that is true, can you predict where job growth will occur? It seems to me that if the problem is aggregate demand, then there should be some sectors that currently are temporarily depressed where you think that employment will recover. Are there inventories to be worked off in automobiles and steel? Do we think that lots of job growth is going to come in the capital goods sector? Should the state and local government sector that Romer moans about, which has lost--what, 100,000 jobs?--be the engine for employing the six million or so people who have lost private sector jobs?

Also, Romer writes,


The recent recession was obviously not caused by tight monetary policy. Interest rates were not especially high when it began, and so the Federal Reserve had only limited room to cut them. It has brought short-term rates down to virtually zero, but it cannot push them below that. The result is that we have not had the strong monetary stimulus that we would normally have in these economic circumstances.

She's telling Scott Sumner to move along, also. Note that she focuses on short-term interest rates as a monetary indicator. But long-term interest rates are not zero, and the Fed certainly has not run out of securities to buy.

Basically, her speech is a plea for more Obaminations. She admits that recovery is needed in the private sector, but her top priority is aid to state and local governments. I can remind you that state and local governments can balance their budgets without cutting jobs simply by reducing pay to workers.


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CATEGORIES: Macroeconomics



COMMENTS (14 to date)
ajb writes:

Her anti-Sumner attack is totally absurd since even Bernanke has taught that the Fed certainly has room to engage in monetary expansion under these conditions. You've hit the nail on the head. She wants to ignore both the Recalculation and pre-Obama Bernanke monetarism to justify the peculiar not quite Keynesian mess of Obamanomics. It's the most disturbing set of comments I've read from a mainstream administration economist. It's certainly at odds with her own work as well. She really has lost her soul.

maybe writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Joe writes:

The following would be a criticism of your position as commented on Delong's website...

"Calling the current level of unemployment "structural" amounts to saying the sectors where production remains depressed were formerly over-producing. Thus, John Cochrane: "People who spend their lives pounding nails in Nevada need something else to do."

Well, maybe the Nevada housing market was over-built. But that hardly explains the continuing low sales of consumer durables and capital equipment across the board.

For example, take automobiles. Before the financial crisis hit, new-vehicle sales were at the level needed to meet population growth and replace worn-out vehicles. There was no bubble of over-production.

With the crisis, sales dropped dramatically. If the current depressed level of new-vehicle sales continues indefinitely, then the US auto fleet will shrink by ~25% as existing vehicles wear out.

In these circumstances, claiming that auto sales are now at the right level seems uncommonly silly."

Charlie writes:

How would you answer her point?

"As a result, some observers have suggested that the workers who lost their jobs in these sectors may have trouble finding work after the economy recovers -- and thus that reallocations across sectors might mean higher unemployment in the long run. In fact, however, we have seen only slight declines in the rate at which workers who have lost their jobs in declining sectors exit unemployment relative to workers who lost jobs in other sectors."

Seems like a reasonable point. If we are moving to a world with less accountants and construction workers, they should have a harder time finding jobs.

Matt C writes:

I'd like to note a queasy feeling at the use of "Obamanations". That kind of catchy name-calling bugs me and I hope it doesn't become common at Econlog.

Does the "irrational drop in aggregate demand" story acknowledge any sort of negative consequences from Keynesian policies? Turning interest rates down to zero and spending hundreds of billions of dollars on stimulus is apparently not enough. What would be too much? Or is "too much" a meaningless concept as long as we're in a recession? What is the Keynesian explanation for the stagflation of the 70s? I know, I'm asking this in the wrong place.

JPIrving writes:

ARG! If MV doesnt equal PY, then there is no economics and we should just give up and live in caves. It seems to me there are enough risks for using monetary stimulus to build a coherent case against it, but to pretend we have hit some sort of limit is insulting.

I guess the silver lining is that Obamanations arent going to work and these people will find themselves out of power sooner or later.

Doc Merlin writes:

'The recent recession was obviously not caused by tight monetary policy. Interest rates were not especially high when it began, and so the Federal Reserve had only limited room to cut them. It has brought short-term rates down to virtually zero, but it cannot push them below that. The result is that we have not had the strong monetary stimulus that we would normally have in these economic circumstances. '

Sigh, nominal interest rates are just prices. She ignores the facts what matters for tightness is:
1) real rate minus natural rate
2) change in interest rates because of nominal stickiness (contracts, long term debt, etc).

Yancey Ward writes:

From Joe:

Before the financial crisis hit, new-vehicle sales were at the level needed to meet population growth and replace worn-out vehicles. There was no bubble of over-production.

What is this assertion based on? Even if we take this at face value, what makes you think that a 25% reduction in functioning autos isn't a sign of a previous overproduction?

Devil's Advocate writes:

"For example, take automobiles. Before the financial crisis hit, new-vehicle sales were at the level needed to meet population growth and replace worn-out vehicles. There was no bubble of over-production."

Is that referring only to the number of vehicles sold? The number of cars may have been right for population growth and replacement, but what about the type of cars being produced?

If there were lots of people getting paid to produce goods that were not really as valuable as the producers once thought (recalculation, if I understand it correctly), then wouldn't people have been more likely to buy more expensive cars than they would have bought had they known that their labor would soon become unnecessary? Wouldn't that create a bubble in the luxury car market, even if the number of vehicles sold was not inflated?

ziel writes:

For example, take automobiles. Before the financial crisis hit, new-vehicle sales were at the level needed to meet population growth and replace worn-out vehicles. There was no bubble of over-production.

That is just silly. There was an obvious bubble in the auto sector, brought on by the same fantasy-financing we had in the housing sector. There's no reason to believe current production levels aren't the new normal.

Tom Grey writes:

In the USA, private, peaceful wages are "too high", meaning companies that can choose to hire market-rate production workers in another country, will do so.
A plant closes in over-paid America, and something similar opens in market-rate paid China, India, Vietnam (Brazil? Poland?).

Those over-paid UAW workers at GM & Chrysler should have already lost their jobs, so that non-union Tenn. workers at Honda would be making similar cars for a lower wage. Chinese & Indian made cars will soon be among the world top sellers.

The gov't, force based (not really 'public') sector is WAY overpaid; so taxes are too high.

The overpaid US worker wage level is why Obamanations will fail to bring the unemployment back down to a "natural" 6-7%, after 10+ years in the over-employed bubble years from around '95. Bubble in tech stocks, bubble in housing/ home equity based over-consumption.


The additional stimulus Americans need is Tax Cuts, now, with reduced pensions for gov't employees later (starting very soon), and reduced wages for gov't workers, and reduced numbers of gov't workers. She's not mentioning these solutions; not part of her alternatives.

Komori writes:

@Devil's Advocate
"Wouldn't that create a bubble in the luxury car market, even if the number of vehicles sold was not inflated?"

As someone who just bought a used luxury car, I have to say that personal observation suggests there quite definitely was a luxury car bubble. You can get some really good deals right now, if you're in the market. The guy I bought it from, who was underwater on the loan, replaced it with basically the non-luxury version.

One of my coworkers has a brother doing auto sales. Anecdotal evidence from him indicates this kind of thing is very common right now.

anon writes:

Why all the pretense? Just say it. The Fed can print money and give it to banks.

PD Quig writes:

Doesn't seem too mystifying to me. Bank credit has been collapsing at record rates. All the money poured into housing is going down a sink hole--never to be seen again. Unemployment is a leading indicator in a consumption-driven economy. Who is going to buy stuff at 2007 rates when they're unemployed and have limited access to credit? Unit labor rates are falling. Hours worked are low. Capacity utilization is below 70 percent. Who is going to invest in new employees when there is so much economic drag being exerted by tax hikes, regulatory ramp up, health care mandates?

Thanks to low interest rates and ignorant, venal politicians, we built far too many houses. Prices have to fall, but we're stopping that from playing out, causing even more money to die on (and mostly off) the balance sheets of insolvent banks. We are refusing to let malinvestment lead to its logical conclusion: failure, bankruptcy.

The only reason retail sales are back from the dead is zero percent financing, big incentives / price slashing, millions of homeowners(?) no longer paying their mortgage payment, a newly contracting savings rate, and unusually large tax refunds due to taxpayers falling into lower income quintiles. Oh, and a few trillions in federal govt spending. New records are being set every month in food stamp usage and long term unemployment compensation. None of which is organic. None of which is sustainable.

Sometimes the answers are just too simple for economists to figure out.

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