Thursday, September 02, 2010

Obama's top economic adviser admits she was and is clueless about the economy

Dana Milbank, no conservative stooge, attended a speech by the outgoing chairman of the President's Council of Economic Advisers, Christine Romer. And Milbank found Romer's presentation rather startling in her admission that she just didn't know how bad the economy was going to be.
Romer, wearing a green suit, read brightly from her text - a delivery at odds with the dark material she was presenting. When she and her colleagues began work, she acknowledged, they did not realize "how quickly and strongly the financial crisis would affect the economy." They "failed to anticipate just how violent the recession would be."

Even now, Romer said, mystery persists. "To this day, economists don't fully understand why firms cut production as much as they did or why they cut labor so much more than they normally would." Her defense was that "almost all analysts were surprised by the violent reaction."

That miscalculation, in turn, led to her miscalculation that the stimulus package would be enough to keep the unemployment rate from exceeding 8 percent. Without the policy, she had predicted, unemployment would soar to 9.5 percent. The plan passed, and unemployment went to 10 percent.

No wonder most Americans think the effort failed. But Romer argued, a bit too defensively, against the majority perception. "As the Council of Economic Advisers has documented in a series of reports to Congress, there is widespread agreement that the act is broadly on track," she declared. Further, she argued, "I will never regret trying to put analysis and quantitative estimates behind our policy recommendations."

But the problem is not that Romer did a quantitative analysis; the problem is that the quantitative analysis was wrong. Inevitably, this meant that, as she acknowledged, "the turnaround has been insufficient."

And what to do about this? Here, Romer became uncharacteristically hesitant to make predictions. She suggested some "innovative, low-cost policies." But the examples she cited - a "national export initiative," new trade agreements and a "pragmatic approach to regulation" - aren't exactly blockbusters.

"The only sure-fire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less," she said. But asked about the main Republican proposal, extending George W. Bush's tax cuts for those earning more than $250,000, Romer replied that doing so would be "fiscally irresponsible."
So short summary: she didn't know what was going on so her predictions were all off. But she's proud of her quantitative analysis even though it was based on false assumptions. Isn't that rather key for any sort of economic modeling? Oh, and she has no idea of what they should do now except that tax cuts are not the answer because that would be "fiscally irresponsible" even though she thinks the government should be spending more money and taxing less." Confused?

So is Christine Romer.


Rick Caird said...

Romer and her husband wrote a paper shortly before she took the White House job. That paper showed tax cuts were more effective than deficit spending in helping the economy.

Romer has never followed up on that paper with her actions in the While House. The only possible assumption is that doing so would have run into severe ideological differences with the rest of the administration. I seem to remember one prominent member asserting he would still favor raising capital gains taxes, even if doing so produced less taxes, because it would be fairer.

This is the idiocy we get from basic economic illiteracy. The problem is business is not investing and therefore not creating new jobs, so the administration's solution is to make investing less favorable. Lord save us from the ideologues.

Freeven said...

It's hard to find fault with Romer for not being able to understand and predict something as complex as the U.S. economy. The fault lies in not recognizing that complexity and in having the hubris to think she (or anyone) can somehow "manage" it.

It's puzzling why so many very smart people continue to believe that a small group of "experts" can better manage the affairs of 300 million people than the people themselves. How could such a group possibly know what's in the best economic interests of everyone or hope to devise a way of controlling the billions of variables that would impose their one-size-fits-all "solution" on all of us?

pumping-irony said...

What is wrong with these so-called "smart" people to cause them to stick with theories in spite of evidence to the contrary? She's proud of her quantitative analysis? Who the hell cares? It was useless! What would these people do if they had to drive across a river but the bridge was out? Would they sit there and wait until it was rebuilt? Would they try and drive thru the waters? Or maybe the "smart" thing to do is to make an adjustment and find a new route. This really bugs me. In the real world, when you have a plan and you can see it's not working or obviously wrong, you don't keep doing it, you do something else! For all their supposed expertise, I wonder if Romer and the other technocrats have the sense to come in out of the rain.

tfhr said...

The notion "that the stimulus package would be enough to keep the unemployment rate from exceeding 8 percent" would be funny were it not so sad that this give-away of over $800 billion American tax dollars to Dem loyalists and their interest groups will be a burden on the rest of us for years and years to come. With so many already unemployed, Obama relied on cynical Chicago payola politics to strengthen his grip on power, or so he thought, rather than searching for a valid option to restore confidence in the economy through measures that would encourage business.

I have no idea how Romer could have deceived herself to such an extent. I guess it comes down to which is most damaging - the apparent academic naivete of a Romer or the certain corruption of machine party politicians like Dodd, Franks, Reid, Pelosi, and Obama. The question is moot however as we get both with this administration.

ScottJ said...

Add to the idea that the "experts" can manage the affairs of 300 million people the conviction on the part of those same elitists that the 300 million people tend to make wrong choices and they must be protected from themselves. Capitalism can't be allowed to work because that leads to SUVs and Walmarts and consumer choice.

Romer has wasted an incredible amount of taxpayer money validating the premise of GIGO-garbage in, garbage out. Its too bad she won't be held accountable for her judgement. She will simply go back to some posh university or government job and not be heard from again.

WarnerME said...

Even now, Romer said, mystery persists. "To this day, economists don't fully understand why firms cut production as much as they did or why they cut labor so much more than they normally would." Her defense was that "almost all analysts were surprised by the violent reaction."

After the slashing and burning that the administration did with the Chrysler bondholders, no business wanted to be in the situation that over took Chrysler .. too little demand, too much supply.

Obama instilled fear into the investment community and the corporate staffs, instead of trying to ride it out, took immediate defense measures to reduce inventory by cutting jobs. Better to disappoint Wall Street analysts and live to see a better day than risk being "sliced & diced" by the yahoos in the White House.

Bottomline, the roughshod manner the administration dealt with economic challenges made matters worse.