Global Economic Watch


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  • Romer: It is Not Yet Time for Austerity Measures

    Christina Romer , chair of President Obama's Council of Economic Advisers until last month, is back at her post in the University of California-Berkeley's economics department. And she will be writing a column for the New York Times (in the Sunday Business section). Her first column hit newsstands (wherever there are still newsstands) yesterday. In it, Romer argues that, while cutting the federal deficit is important, "now is not the time." Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially. The study considers a wide range of advanced economies over the last three decades, so it doesn’t put too much weight on unusual episodes or focus on examples supporting particular conclusions. It also breaks new ground by looking specifically at times when governments changed taxes or spending with the aim of reducing deficits. Previous studies looked at summary measures of the budget situation, and likely included cases when strong economic performance caused lower deficits, not the other way around. The recent experience of countries already carrying out austerity measures is consistent with the central finding of the I.M.F. study. Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits. Taking budget actions now that would further increase unemployment would be not only cruel, but also short-sighted. The longer unemployment remains high, the more likely it is to become permanent as workers’ skills deteriorate and they gradually drop out of the labor force. Such a situation would be terrible for both the affected workers and the long-run budget situation. Imagine a patient with a slow-growing tumor who is also recovering from pneumonia. The outcome is likely to be worse if the patient is not given time to recover before undergoing surgery. Read Now Isn’t the Time to Cut the Deficit here .
  • Christina Romer on Financial Regulation

    It remains unclear whether Congress will push through financial regulation reform anytime soon, and what exactly that reform might look like ( Reuters outlines key differences between current House and Senate proposals ). Christina Romer , chair of the President's Council of Economics Advisers , spoke with Charlie Rose about some regulatory reform that she thinks would help, and about why she thinks regulatory reform is necessary now. Here's an excerpt from that interview: Watch the full interview here . Some Wall Street bankers are making it clear that they expect tighter regulation will drive up costs for consumers. Marketplace 's Bob Moon reported on JP Morgan Chase's anticipated cost adjustments and how it might affect shareholders and consumers. Here is his report :
  • Romer on the Jobs Summit and Ideas for Public-Private Partnerships

    In what the White House is calling a jobs summit, President Obama is sitting down with economists, business leaders, labor leaders, and small business owners tomorrow to discuss ways to battle unemployment. And Christina Romer , chair of the President's Council of Economics Advisers , shares one of her goals--to generate ideas that encourage the private sector to work with government to generate more jobs: Many ideas under discussion build on partnerships with the private sector. Given the budget deficits this administration inherited, it is critical to leverage scarce public funds. More fundamentally, when businesses seem hesitant to hire and productivity is surging, we need to harness the private sector, bringing large and small firms in off the sidelines to boost job creation. One idea is to give direct incentives for homeowners to retrofit their homes to improve energy efficiency. This approach would be convenient and certain, and it could encourage millions of homeowners to make cost-effective investments they might not have done for years, if ever. It could help both stimulate the manufacture of retrofit products and increase construction employment. Others have suggested incentives to help small businesses invest, grow and create jobs. This could include measures to restore the flow of credit for small businesses and targeted tax cuts. In these types of ways, a moderate and targeted investment by the government might be leveraged into significant employment gains and purchasing power by small businesses. Direct government investments can also play an important role. We've already seen from the Recovery Act that spending on infrastructure—everything from roads and bridges to schools and municipal buildings—is an effective way to put people back to work while creating lasting investments that raise future productivity. All these ideas are just that—ideas to be discussed, refined and evaluated. Action on any measures to spur job creation will be worked out with Congress after careful study, and will be done in a fiscally responsible way. But it is important to use Thursday's Jobs Forum at the White House as a chance to confront the challenges our workers and firms face, and explore creative, cost-effective solutions. Read Romer's full op-ed here .
  • Health Care Challenges for Small Businesses

    BusinessWeek's Joshua Kendall has an article that helps explain why small business owners are paying a lot of attention to the push for health care reform. Kendall writes about some businesses' experience of having their health insurance costs skyrocket after an employee becomes "gravely ill." A practice that one former CIGNA employee calls "purging": Purging: It's an ugly word, and it describes an ugly practice. But Wendell Potter, formerly the director of media relations for CIGNA ( CI ), says that's exactly what health-insurance companies do when an employee at a small business is unexpectedly hit with a sudden, and expensive, illness: The insurance company "purges" the small company from their rolls. In June testimony before U.S. Senate Committee on Commerce, Science & Transportation, Potter said health-insurance companies "dump small businesses whose employees' medical claims exceed what insurance underwriters expected. All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year's premiums so high that the employer has to cut benefits, shop for another carrier, or stop offering coverage altogether—leaving workers uninsured. The practice is known in the industry as purging." Read Small Biz Purging: When Companies Lose Health Care here . Meanwhile, the Obama Administration continues put together statements and reports aimed at showing its support of small business. And nobody has been pushing the case of late more than Christina Romer , chair of the Council of Economic Advisers . Here she is following up last week's QandA on what's in the health care reform proposals for small business with another argument for why small businesses need health care reform as much, or even more than, any group:
  • Christina Romer 'On Point'

    Council of Economics Advisers chair Christina Romer was Tom Ashbrook 's guest today On Point . Ashbrook was asking Romer and listeners whether it is time for a second stimulus package. Romer wouldn't commit to a clear yes or no. For example: TOM ASHBROOK: What would it take for you to say, “You know what, we tried, but it wasn’t enough, it’s time to pull the trigger”? 10.5 percent unemployment? 11 percent unemployment? What would it take for you to advise that? CHRISTINA ROMER: I think the crucial thing is: What’s the direction that we’re moving in, right? So one of the things that, you know, I think people have forgotten is just what the economy — I’m sure they haven’t forgotten — what the economy was like in December and January. We were truly an economy in freefall. And I think one of the things we’ve been seeing is moderating conditions. We’ve started to see some of those leading indicators, like building permits, orders for durable goods — those kind of things that tend to turn around before the actual economy turns around. You know, what I’m going to be looking at is, Are we on the right path? And certainly we do have to give the stimulus the time to have an effect. Simply because we do know we’re getting a lot more money out the door in the next several months, and we’ll be getting a read on, Is that doing what we think it should be doing? The interview is worth a listen, and while Romer doesn't say yes or no to a Stimulus II, she doesn't run away from the issues. Take a listen here .
  • Romer and Lessons from 1937

    Christina Romer , chair of the President's Council of Economic Advisers, has a guest article in the latest Economist. Romer, who has been bullish on the Obama Administration's economic recovery plan, writes that we need to look back to 1937 to understand why, in her view, the stimulus spending is the right antidote for this recession. During FDR's first four years in office, the economy rebounded from the Depression in "rapid" fashion--"annual GDP growth averaged 9%." Unemployment dropped significantly in that period. But come 1937, unemployment surged (see chart at right from the Economist), as the country went into a deeper downturn. Romer: ...The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. One source of the growth in 1936 was that Congress had overridden Mr Roosevelt’s veto and passed a large bonus for veterans of the first world war. In 1937, this fiscal stimulus disappeared. In addition, social-security taxes were collected for the first time. These factors reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure. Also important was an accidental switch to contractionary monetary policy. In 1936 the Federal Reserve began to worry about its “exit strategy”. After several years of relatively loose monetary policy, American banks were holding large quantities of reserves in excess of their legislated requirements. Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed or if “speculative excess” began again on Wall Street. In July 1936 the Fed’s board of governors stated that existing excess reserves could “create an injurious credit expansion” and that it had “decided to lock up” those excess reserves “as a measure of prevention”. The Fed then doubled reserve requirements in a series of steps. Unfortunately it turned out that banks, still nervous after the financial panics of the early 1930s, wanted to hold excess reserves as a cushion. When that excess was legislated away, they scrambled to replace it by reducing lending. According to a classic study of the Depression by Milton Friedman and Anna Schwartz, the resulting monetary contraction was a central cause of the 1937-38 recession. Red the full article here .