Streetwise Professor

Christina Romer’s appearance on Fox News Sunday provided a graphic illustration of how academic economists must sacrifice their credibility, not to say their integrity, when they take high-profile policy positions in a presidential administration.  Romer made several statements that she cannot possibly believe.  She tap-danced on many other issues.  All in all, a very sad performance.

Issue 1–The growth assumptions in the Obama budget.  Romer originally said:  

When you get out five, 10 years, they’re [the Congressional Budget Office] assuming that real GDP is only going to grow about 2.2 or 2.3 percent a year, and that’s just lower than private forecasters. It’s lower than the Federal Reserve. And we think it’s just too pessimistic.

So I think a big part of why they’re getting such different numbers are just some of these technical issues.

When Chris Wallace pointed out that the Blue Chip private forecasts actually had lower 10 year average growth numbers than the CBO, she spun:

Yeah, but they — they actually — something like the Blue Chip has very negative numbers for the next year or two, but then when you get back to normal, when you get back to normal growth, they’re up there at 2.6 or 2.7, whereas the CBO only comes back to, say, 2.2.

This line of questioning arose because the CBO’s growth projections implied that the Obama deficit projections were wildly optimistic, both over the short term and long term.  Thus, Wallace’s comparison is a fair one.  The issue isn’t with the growth rate 10 years out.  It is with growth rates over the next 5-10 years.  

And those “very negative numbers for the next year or two” are not a minor issue, as Romer suggests.  They are very important.  The talk-out-of-both-sides-of-our-mouths Obama administration (a) talks about the worst economy since the Depression when attempting to panic people into supporting stimulus and everything else, but (b) in making deficit projections, assumes that the decline in 2009 GDP will be modest, on the order of -1.2 percent if memory serves.  But if the Blue Chip guys are right, or if CBO is right, and the recession is much more severe in 2009, Obama’s projection of a trillion dollar plus deficit will be laughably low.  And if the average growth rate over the next 10 years is a half-point lower than the administration projects, due to the miracles of compounding, the cumulative deficit will be far larger than the administration predicts.  

In brief, Romer’s defense of the administration numbers was extremely weak, and arguably dishonest.  On the one hand, she compared unfavorably the CBO numbers to private forecasters.  When called on the real numbers, she attempted to obfuscate matters by focusing on the projections 10 years out, when (a) the near term private and CBO projections are far more pessimistic than the administration’s, and (b) the average 10 year projections are also far more pessimistic, both of which imply (c) that the administration’s budget numbers are wildly optimistic.  

I would also note that it is extremely optimistic indeed to believe that large tax increases, the adoption of cap and trade, and other administration initiatives will not seriously retard growth.  Thus, I wouldn’t be surprised if the CBO and Blue Chip numbers are optimistic.

Issue 2–Romer stumbled badly when Wallace pointed out the inconsistency between the positions she is advocating now, and her academic research.  Her academic research casts serious doubts on the efficacy of fiscal policy.  She now argues that it was all just a timing thing, that Congress always implemented fiscal stimulus too late in earlier recessions, but that this time the administration and Congress enacted stimulus at just the right time.  That is a very dubious proposition.

Issue 3–The Fed’s “Shock and Awe.”  This is the biggie, and speaks to Issue 2 as well.  Here’s the exchange:

While everyone was focused on AIG, it went almost unnoticed that the Federal Reserve is pumping another $1 trillion into the financial system.

Do you have any worries as an economist that pumping all of that money into the system is going to drive the value of the dollar down and lead down the line to inflation?

ROMER: No. Actually, I have to say I — I think starting back with Paul Volcker in the early 1980s, the Federal Reserve has shown itself completely capable of keeping inflation under control. And I have every confidence that they will continue to do that.

I think what we’re seeing coming out of the Fed is the same thing we’re seeing coming out of our administration and the Congress, of a sense that we have a big problem and we need to take bold actions to deal with them. We’ve done that on the fiscal side, and the Fed has done that on the monetary side.

What you don’t see in the black-and-white of the transcript is how vigorously and quickly Romer said “No!”  Now, any economist who claims not to have concerns about the potential inflationary impact of the Fed’s printing of money in unprecedented quantities is either clueless, or lying.  Even those who support the Fed’s action will usually express some qualms, and say things along the lines of yes, this can be inflationary, but I worry more about depression now than inflation tomorrow.  

Romer also fails to mention the costs of “keeping inflation under control.”  The costs, that is, of the Volcker policy of the early 1980s.  The cost of that policy was a severe recession.  A recession that the current one has yet to surpass in intensity (though it well might.)  Those costs were incurred, moreover, only after years of inflation had inflicted so much damage on the economy that Volcker (and Reagan, who supported him) believed that the pain of a severe recession was smaller than the pain of continuing, chronic inflation.  

The inflation resulting from the massive injections of cash into the system in recent months could well make the late-70s early-80s inflation look like child’s play.  Consequently, the costs of fighting it could make the 1982-83 recession look similarly benign by comparison.  Moreover, even if the Fed acts prior to inflation heating up to withdraw massive amounts of liquidity from the economy, that could well abort any recovery, and spark another recession.  After all, if the injection of huge reserves is expansionary, would not the withdrawal of such reserves be contractionary?  Is there likely to be some asymmetry between the effects of expanding massively and contracting massively the money supply?  None is immediately obvious.  Perhaps particularly adept navigation by the Fed would allow the economy to sail between the Scylla of massive inflation and the  Charybdis of continued (or renewed) depression. But the probability of a less than wily Odysseus-like performance is very high.  Indeed, the worst of both worlds–stagflation–is a very plausible outcome.  

This pessimism is particularly warranted when one considers that in the 90s and 2000s the Fed was operating in a relatively benign policy environment, and under political pressures still made very unwise judgments that contributed materially to our current circumstances.  To avoid the possibility of even a mild recession, the Fed fed credit and real estate bubbles, the popping of which devastated the economy.  The likelihood that the Fed will shrink from taking actions that risk a severe recession in the immediate aftermath of a depression is very high.  

In brief, Romer’s “don’t worry, be happy” attitude about the Fed’s unprecedented actions is very disturbing.  It is either deeply dishonest, or reflects a lack of serious thought about the daunting dangers that the economy must avoid in the coming months and years.  

I wish, moreover, that Wallace had asked a follow up question.  (This is not a criticism of Wallace–he did a very good job.)  That is to question her about the inconsistency between the meaning of the Fed’s actions, and her sunny optimism about the effects of fiscal policy, and the economy’s prospects in a year’s time.  The question would be: “If your belief that the stimulus and the Obama budget will be sufficient to make the economy healthy in a year’s time is correct, why did the Fed feel compelled to take historically unprecedented actions to spur the economy?”  The Fed’s action is clearly an expression of hair-on-fire alarm that gives the lie to the administration’s belief in the efficacy of its policies.  This action is a huge vote of no confidence.

To add a somewhat snarky aside, the fact that Romer’s interview was delivered in a tone more befitting Miss Nancy Claster from Romper Room talking about Do Bees was extremely annoying.

One last remark, relating to the difference between Freshwater and Saltwater economists (Romer being one of the latter, both as a PhD student and as a professor).  Very few (I can’t think of any) Chicago economists have taken major policy jobs in any administration, Republican or Democrat.  (Goolsbee is an exception, but he’s not Old School Chicago.  I’m referring mainly to the Giants Who Once Roamed Hyde Park.)  In contrast, there has been a steady stream of Harvard and Berkeley types (and those from other Briny institutions) going to DC.  

Why is that?  One reason, no doubt, is the skepticism most U of C people have (had) about government.  But another is that the Knights and Friedmans and Stiglers and Beckers were far more interested in fierce, uncompromising intellectual inquiry than sitting at the foot of power.  I think too that they understood that for the most part, academic economists in any administration are primarily there for show, and have little real influence.  As a result of these factors, they were unwilling to sacrifice their intellectual independence–or their integrity–and fall for the Siren’s song of political influence.  (Another Odyssey reference!–just stream of consciousness, I swear.)  

One story that I remember vividly brings this to life.  After George Stigler won the Nobel Prize in 1982 (I was taking a class from him that quarter), he was invited to the Reagan White House for a press conference.  The Reagan people probably figured that Stigler was a conservative guy, and he would say nice things about the economy, the administration, etc.  Boy, were they wrong.  When Stigler was asked about whether the economy was in a severe recession, he said something along the lines that no, he thought it was in a depression.  The look of panic on the Reagan people in the room was palpable.  They just about got a hook to pull Stigler off-stage like a bad Vaudeville act.  But that was Stigler.  And that was Chicago.  Take no prisoners, tell it like it is.

Another story.  I did some expert work on the same case as a quintessential Harvard guy, the late Hendrik Houtthaker.  (A very nice man.)  I was having dinner with him one time, and he remarked about how civilized seminars were at Harvard, and how brutal they were at Chicago.  True, that.  You have to jock it up and get ready for combat to give a seminar at Chicago.  In the 80s, the Economics of Legal Organization seminar would have Posner, Becker, Telser, Stigler and Peltzman in the front row.  If the speaker was able to complete two sentences without getting set upon by one, two, or the lot of them, it was a miracle.  I think Lester Telser would say “That’s the dumbest thing I ever heard”–every week’-)  (You know I love you, Les.)  Stigler would ostentatiously read the Wall Street Journal during the seminar when he thought the paper a bad one.  

That’s not DC style, folks.  I think Posner said once, when asked about his prospects for the Supreme Court, something to the effect that his work was not understandable to the Congressional intellect.  That’s true, too.  

This all speaks to the fierce independence and just plain cussedness (and arguably arrogance) of Old School Chicago School that made it and its leaders particularly unsuited to be house economists in DC.  For as Christina Romer demonstrated today, to be an economist with a public profile in any administration, it’s not whether you are saltwater or freshwater that matters.  It’s that you are ready, willing, and able to go onto national television and drink bilgewater, and then tell the world it tastes like fine wine.