David R. Henderson  

Christina Romer's Contradiction

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Here's a paragraph from Christina Romer's op/ed in the New York Times:

Now is not the time [to cut the deficit]. Unemployment is still near 10 percent in the United States and in Europe. Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like "double dip" as we struggle to recover from the Great Recession.

I won't, on this post, take her on on this. That's a bigger task. But let's assume, which I don't, that she's right. She's saying, among other things, don't raise taxes now. But now look at a paragraph later in the piece:
While immediate fiscal tightening isn't wise for the United States, we do need to address the deficit. The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. France's recent plan to gradually raise its retirement age to 62 from 60 is a classic example of such "backloaded" reduction. President Obama's proposal to eliminate the Bush tax cuts on high incomes is another: it would raise revenue by only $30 billion in 2011, but by more than $600 billion over the next decade.

Notice the contradiction? We should wait until the economy is back to normal before reducing deficits; she doesn't mean January 1, 2011. So what does she give as her only example of a policy change that will reduce deficits when things are back to normal? A tax increase that will happen in under 70 days. I guess you could call this paragraph an example of taking one for the previous boss.

HT to Greg Mankiw


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COMMENTS (7 to date)
McMonster writes:

Read the second paragraph again. Pay special to the words "only" and "but" in the last sentence.

Daniel Kuehn writes:

First, what McMonster said. Isn't the point that the deficit is still a medium to long term problem so you pick the policies now that address the medium to long term without substantially harming the near term (when deficits aren't the biggest problem). Why do you think this is such a contradiction, David? You seem to be highlighting precisely the points where Romer handles the trade-off consistently!

Second, whether you agree with her or not, isn't it pretty clear that her point is the tax cuts for the rich aren't as stimulative as other measures. I disagree with Romer - I don't think the tax cuts for the rich should expire right now. But if you're going to grant her point that stimulative measures are the priority, you can't subsequently disregard her point about what is stimulative and what isn't as stimulative.

Economic policy is always about trade-offs. She's trading off the least stimulative of the near-term menu of policies for more deficit reduction in the medium to long term.

Where is the contradiction or problem?

Robbie writes:

McMonster,

If an average of $60bn per year, from an economy which will presumably be larger than at present, over the next decade is a significant contribution to reducing the deficit then surely $30bn is a significant tax increase now?

Gary Rogers writes:

Somebody needs to start taking this argument on, whether in this blog post or not. We keep hearing that increased government spending is necessary in a serious recession but there is no basis for the theory. Yes, you can get a temporary increase in economic activity, but it comes at a cost that is generally unseen. The whole argument for increasing government spending depends on ignoring the costs of draining resources out of the private sector to finance the spending while focusing on visible benefits bestowed on its beneficiaries. This argument has been made almost as long as we have had governments. It is tremendously popular because it lets those in charge show how much they care and point to visible benefits that make them appear to be doing something worth while. The argument has been made so often it is now considered to be common knowledge and, as Ms. Romer says, is included in most of the macro-economic models used today. But that does not make it true. The evidence is in the failed policies of the last several years, including many policies of Republican administrations. The evidence is also in FDR’s failure to ever bring the United States out of the Great Depression and in the Japanese attempts to buy their way out of the lost decade of the nineties. Our government cannot spend our way to prosperity.

I am becoming increasingly angry at people, who should know better, failing to challenge the need for increased government spending or for failing to challenge the statement that we would be much worse off if we had not spent trillions of dollars in stimulus. It is simply not true and I challenge anyone to prove that it is.

Bob Murphy writes:

David, unfortunately I have to agree with your detractors here. Romer is saying, "Sure, it raises taxes right away, but the short-term hike is negligible; a mere $30 billion in 2011. But over the decade, it's expected to reduce the deficit by $600 billion."

Now I suppose you could still zing her by saying, "Huh? So cutting the deficit by $63 billion a year [the average from 2012-2021] is fantastic and will matter a lot, but raising taxes by $30 billion in the midst of recession is negligible? At what point does negligible turn into effective? $48 billion?"

But from your post, it didn't seem like you were getting the nuance of her position.

David R. Henderson writes:

@Bob Murphy,
Like Robbie above, I don't think you can say that $30 billion is negligible but $60 billion is not.

Colin K writes:

Let's not forget that the rich exhibit the highest sensitivity to changes in marginal tax rates. At the very least they should not raise the capital gains tax.

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