Romer, A Study In Contradictions, Pirouettes Yet Again On Stimulus

By Michael Fumento

Investor’s Business Daily, August 24, 2009
Copyright 2009 Independent Journalism Project

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Which version does the CEA chair subscribe to, hers or Obama’s?

There was never doubt that whenever the economy began turning around the Obama administration, and especially the $787 billion stimulus package, would get the credit.

"Absolutely" the stimulus package was working, Christina Romer, chair of President Obama’s Council of Economic Advisers, insisted in an Aug. 6 address to the Economic Club of Washington D.C.

Yet she accompanied that talk with contradictory evidence — which is about par considering that since joining the administration Ms. Romer has herself become a contradiction.

Along with her speech, Romer presented a table with calculations of the percentage of 2009 GDP "discretionary fiscal stimulus" spending in various countries. It showed that the U.K. spent 1.5% of its GDP on stimulus, the same as Germany and more than twice that of France at 0.6%.

Yet even as the German and French economies grew by 0.3% in the second quarter, according to Eurostat data released last week, the British economy plummeted 0.8%. Sweden spent more than twice the proportion of its GDP on stimulus (1.4%), as did France, yet had no growth.

And the U.S.? It outspent everybody, Romer boasted. Her table shows we spent 2.0% of GDP. In her talk, she said "roughly 5% of GDP," which represents the entire $787 billion as a portion of the projected GDP for this year, though it will actually be paid out over several years.

Choose whichever figure tickles your fancy; it remains the case that for all President Obama’s personal back-slapping and media crowing of "disproved" stimulus skeptics, the U.S. economy shrank 1% in the second quarter. It was remarkable only in being a major improvement from the previous quarter.

Of course, a mere measurement of overall stimulus spending allocations vs. growth in one quarter is grossly simplistic. But certainly it’s no more so than declaring, "We’re spending stimulus funds, the economy improved last quarter, ergo stimulus funds caused the improvement."

But if it isn’t stimulus money reviving economies, pray what could it be?

"When the economy goes down there are restorative forces that drive it back up," observes UCLA economics professor Lee E. Ohanian. "That’s important because there is the view that without substantial government programs you’ll go down and stay down for a long, long time."

Yes, just as certain bumper stickers remind us that stuff happens, so do recessions followed by recoveries.

In fact, there were 12 recessions or depressions just from 1850 to 1900, according to the National Bureau of Economic Research, and plenty before that. All before government could even pretend to do much about them. And somehow the economy recovered each time.

Not incidentally, despite mythology, U.S. recovery during the Great Depression began in the second quarter of 1933, even while Congress was still voting on the earliest New Deal legislation. Sadly, a similar myth helped propel Hitler to power months after Germany’s recovery began.

As for actually ending the Depression, "currency devaluations and monetary expansion became the leading sources of recovery throughout the world," wrote a highly regarded economic historian in 2003. "Fiscal policy, in contrast, contributed almost nothing to the (U.S.) recovery before 1942," she asserted in a 1992 paper.

Yes, that was Christina D. Romer — back when she was just a humble Berkeley economics professor.

Yet the Obama-version Romer insists that fiscal stimulus is "a well-tested antibiotic, not some newfangled gene therapy." She herself recognizes this seeming double standard. "Some have concluded" from her 1992 paper, she told the Brookings Institution in a March 9 speech, that "I do not believe fiscal policy can work today or could have worked in the 1930s. Nothing could be farther from the truth."

"Some" may have reached that conclusion because her 1992 paper contains no hint that fiscal policy of any size or length has any benefit. Her 2003 paper does have such a hint, but only in the case of Japan and only "combined with substantial monetary expansion and an undervalued yen."

The only problem with the U.S. government’s Great Depression stimulus, she said at Brookings, is that it was too small and too short. Yet there she was, Aug. 6, insisting that a small, short stimulus had "absolutely" helped turn the economy around.

Tellingly, she felt obligated to exaggerate it, claiming, "As of the end of June, more than $100 billion had been spent," giving the Recovery.gov Web site as her source. That Web site, however, actually says only $60 billion had been "paid out" by then, much less actually spent by recipients.

Regardless, both figures pale in comparison with the $2 trillion the Fed had already pumped into the economy by April 2, when the first stimulus dollars were going out.

It’s debatable to what extent monetary policy has helped the economy. But regardless, the stimulus-plan-promoting Christina D. Romer Version 2008 is plagued with bugs.

"Politics is the art of the possible," German Chancellor Otto von Bismarck famously said. Under the Obama administration, apparently it’s become the art of the impossible.