Romer: We had no clue … and still don’t

Christina Romer exits the administration this month, and perhaps she felt compelled to engage in a little truth telling.  If so, that may have been a little more truth than the people at the National Press Club, who had gathered to hear her valediction as chair of the White House Council of Economic Advisers, had prepared themselves to handle.  Dana Milbank describes how depressing it was to the gathered media to have someone on the inside of the Obama administration tell them that the emperor and his staff have no clothes when it comes to the economy:

She had no idea how bad the economic collapse would be. She still doesn’t understand exactly why it was so bad. The response to the collapse was inadequate. And she doesn’t have much of an idea about how to fix things.

What she did have was a binder full of scary descriptions and warnings, offered with a perma-smile and singsong delivery: “Terrible recession. . . . Incredibly searing. . . . Dramatically below trend. . . . Suffering terribly. . . . Risk of making high unemployment permanent. . . . Economic nightmare.”

Anybody want dessert?

Just how bad was it?  Romer admitted that no one at the White House understood the fundamentals of this recession, and how they just assumed it would behave like previous recessions.  And it might have done so, had the Obama administration applied the policies that alleviated previous recessions, especially those that Ronald Reagan used to pull the US out of a decade-long stagnation slump where high inflation eroded the buying power of Americans.  Instead of cutting taxes (especially capital gains taxes) and reducing regulation to entice new investment, Barack Obama and Congressional Democrats chose to chase a government takeover of health care, a massive tax on energy production that would penalize expansion and growth, and expanding the jurisdiction on Wall Street of the same agencies that had watched the collapse come and did nothing about it.

Romer, however, still hasn’t got a clue why a one-time expenditure of government funds didn’t make things hunky-dory:

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.”

“Almost all analysts”?  Only those who work in the White House.  No one doubts the magnitude of the recession, but that’s only part of the story today, and a rapidly diminishing part at that.  The wealth that got destroyed in the bubble collapse has already gone, but there is still plenty of capital left to get the engine of wealth creation primed and pumping again.  The “violent reaction” came to the radical Democratic agenda of government expansion and massive deficits, which is why the normal post-World War II pattern of recovery hasn’t appeared in this instance, and most likely won’t until a new Congress arrives to force the administration into a different, pro-growth direction.

Romer bristles at the perception that she and Obama miscalculated the response, but as Milbank notes, her defense is rather pathetic.  Why, she performed quantitative estimates!

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 it’s not just that, either; it’s also that the White House ignored a long track record of the successful and unsuccessful strategies in dealing with recessions over the last several decades.  When Keynesianism has been tried, it has failed and instead ushered in stagnation and economic drift.  When tax cuts and streamlining have been implemented, expansion and job growth followed.   This administration somehow believed it could reinvent economics so that it performed just like it does in the laboratories of the Ivory Tower, where their top-down, command-economy projects always succeed.  As Romer admits, to the consternation of the media that failed to vet Barack Obama and his policies as a candidate, is that no one in the White House has a Plan B.