Economist Christina Romer Details Recovery Act

Christina Romer
Christina Romer

Economist Christina Romer gave a talk titled “What Do We Know About Fiscal Policy? Separating Evidence From Ideology” on Nov. 7 as a guest of the Levitt Center.  Romer was chair of the Council of Economic Advisers (CEA) in the Obama administration, from Jan. 2009 until Sept. 2010. Currently, she is the Class of 1957 Garff B. Wilson Professor of Economics at the University of California Berkeley.


Professor of Economics Betsy Jensen introduced Romer. The two have been friends for 30 years, ever since their meeting in graduate school. Jensen referred to Romer’s achievements as “home runs.” She identified Romer’s careful use of evidence as an important part of her friend’s professional success. While Romer may have had a “jump-into-the-fire” introduction to policy-making when she began working for President Obama, she used her extensive knowledge of both history and economics to make sound decisions.


Romer began her talk with an anecdote. During her first meeting with Obama in 2008, she remembers him saying that the employment of fiscal policy was the only way for the country to improve its economic situation. She disagreed with him.


But after spending some time in the White House, she started to think that Obama might have had the right idea at their first meeting in Chicago. “We needed to hit it with every tool we had,” said Romer of the recession.


Most notable of the “tools” the Obama administration used during Romer’s time as CEA chair was the American Recovery and Reinvestment Act of 2009. Many people looked at the $787 billion cost of the Recovery Act and immediately declared their disapproval. But Romer urges people to look beyond that figure and consider the policy’s effects.


“Over the last three years, there has been more research on fiscal policy than in the last quarter-century,” said Romer. During her talk, she cited several scholarly papers that measured the impacts of various policies.


Her first example looked at the Economic Stimulus Act of 2008, passed by Congress during the Bush administration. Economist John Taylor argues that the policy was ineffective because the tax rebates did not increase consumption. However, Romer believes that the fact that consumption remained level was a good sign. She proceeded to cite Mark Zandi, another economist, who considered household wealth in his analysis of the effects of the Stimulus Act. He provided evidence of the Stimulus Act’s positive effects, keeping in mind the fact that household wealth had decreased.


“You can’t deduce the effect of a tax rebate by just looking at what happened after,” Romer said.


Collaborating with her husband, David Romer, she provided further support for the theory that exogenous tax changes predict larger estimated economic growth. But Romer asserted, “I’m not a Keynesian economist; I’m an empirical economist.”


Another research method Romer highlighted was the use of cross-sectional data. Across states and individual citizens, policies have different effects that must be considered. For example, a study by Parker, Soueles, Johnson and McClelland showed that the times when people received their rebate checks, which were distributed at random after the Stimulus Act was passed, affected their spending.


Romer then used these methods to assess the impact of the Recovery Act.


“We have a lot of evidence that the Recovery Act had large effects,” she said.

To begin, she used an analogy, likening the country’s economic state to a car crash victim. Immediately after surgery, a patient will not have fully recovered from the damage incurred during the crash. However, the patient is alive. And, over time, he or she will heal.


Romer showed a simple statistical model forecasting the GDP, had the Recovery Act not passed, and comparing that data with the actual outcome of the Recovery Act. In response to the policy change, the GDP stabilized and then increased. The predictions of what could have happened were far less positive, showing a progressive decline and an eventual, gradual increase.


She also referenced two cross-sectional studies—one supporting the outcome of the Recovery Act, one criticizing it.


“The biggest deficiency of the Recovery Act was that it was too small relative to the problem we were facing: the worst recession since the Great Depression,” Romer noted.


At the end of her talk, Romer reemphasized the need for the government to “pass aggressive plans that will shrink deficit over time” and lower unemployment rates quickly. She said that the evidence in favor of fiscal policy is stronger than ever.


“I don’t see how we’ll ever solve our problems unless we just face the facts,” Romer concluded.


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