Christina Romer is a good economist, not a great one. She was Chair of President Obama’s Council of Economic Advisors (CEA). She had the good sense to leave, or maybe she was pushed, and return to Berkeley.
She wrote a column in this past Sunday’s New York Times entitled: “Dear Ben: It’s Time For a Volcker Moment”. If this reflects the quality of the advice she offered, no wonder Larry Summers did not take her seriously, and Obama’s economic policies have been a shambles.
The gist of her argument is that Ben Bernanke and the Federal Reserve should target the path of nominal GDP growth. In other words, the Fed should commit to conduct monetary policy to keep nominal GDP on a “sensible path”. Romer claimed “it would be a powerful communications tool. By pledging to do whatever it takes to return nominal GDP to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth. Such expectations could increase spending and growth”.
This is truly unadulterated nonsense on many levels!
She started by referring to the “Volcker moment” in the early 1980s when the rate of inflation exceeded 10%. Paul Volcker, who was Chair of the Federal Reserve at that time, slammed on the monetary brakes, pushing short-term interest rates beyond 20% in order to squeeze inflation and inflationary expectations out of the economy as quickly as possible. His actions worked. But economists always knew that monetary policy works in driving the economy into the ground. Slam the brakes hard enough and the economy not only comes to a stop, but it goes into reverse.
Fighting inflation is easy, as long as there is a commitment and an understanding of the inflationary process, a process that changed significantly in the 1990s with the growth and integration of China into the global market. It took Alan Greenspan, the Chair of the Fed during the 1990s, quite a while to recognize this important change in the process – many academic economists have yet to realize the change.
Economists also understood that monetary policy might be ineffective in stimulating growth. Pushing the monetary gas pedal to the floor might be akin to pushing on a string. Indeed, this appears to be the case at this time. Short-term interest rates are at rock bottom, and Bernanke has tried everything to generate growth in the money supply. All he has succeeded in doing is producing over $1 trillion in bank deposits with the Fed, and record profits for the Fed.
The banks are unwilling to lend, and targeting, as proposed by Romer, would not induce banks to change their behavior at this time, particularly with the ongoing uncertainties.
Does Romer really believe that Bernanke has not tried everything at his disposal to produce higher rates of real and nominal GDP growth? Does Romer really believe that Bernanke would not be pleased if the US economy were on a higher GDP trajectory with a substantially lower unemployment rate? Obviously, she has not read his speeches, or does not understand them.
Bernanke has made it clear that monetary policy has reached its limits in stimulating higher rates of growth, and that the onus is on fiscal policy and the US Government to push the economy ahead. Nowhere in her column does Romer discuss fiscal policy, an area where she did provide advice when she chaired the CEA. Is she just playing the cover my ass game to shift the blame onto the Fed for the dreadful performance of the US economy at the present time? Or worse yet, does she really believe what she is recommending?
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.