On Christina Romer

In a recent article in TNR, John Judis deconstructs the fiscal and economic theories underlying Romer's (Obama's new cabinet appointee) approach to the Great Depression. Admitedly, the critique does not focus on what she is saying should be done now, but if her approach to the Great Slump is any indication, its Right of even most mainstream Democratic thinking on the matter. Here's an excerpt from the article:

"In a paper delivered in September 2007, Romer addresses more directly recent government fiscal and monetary policy--but with the same implications. She contends that after World War II, the Truman and Eisenhower administrations developed a "modern" fiscal and monetary policy that was remarkably successful. It stressed a commitment to budget surpluses to prevent inflation and the use of deficits only in the extremity of a recession. During the Kennedy and Johnson years, Romer argues, the U.S. abandoned this approach for one that sought to maintain low unemployment (a four-percent target) through, if necessary, persistent budget deficits. Romer contends that the '60s model led to the high inflation and unemployment of the '70s."

This is seems to accord with the standard conservative reading of the economic history of the 20th century, which we should contrast with:

"The standard account has been that the U.S. economy began to revive from 1934 to 1937, when Franklin Roosevelt's government hiked public investment and ran budget deficits; that the recovery stalled in 1938 after Roosevelt erroneously put the breaks on the economy and tried to run a surplus; and that the country only recovered from the depression after that because the U.S. began running deficits again and because of growing war orders from abroad; and that the final recovery awaited the massive public defense investment in 1941 and 1942. Gross public investment increased 150 percent from 1940 to 1941, and that's when unemployment began to plummet."

She emphasizes monetary over fiscal fixes which seems to be precisely the wrong view about how to fix the current situation (given that monetary fixes via interest rate cuts by the Fed have proven to be a total failure in reversing the slump). Of course, this is not what the Obama transition team has been pushing for, so her mere appointment is certainly no indication of radical change in course. Nonetheless:

"If Romer's views of September 2007 are applied to November 2008, what do we get? Deficits, but with an eye toward surpluses, and an emphasis--going back to her article on the Depression--on monetary rather than fiscal expansion as the solution. If that is, indeed, what Romer advocates, that's probably not the change we need--or that Obama has promised."