Ex-Obama economic adviser Romer says fiscal stimulus is central to combatting recessions
For all the wrong reasons, the term “fiscal stimulus” became a dirty word in the wake of the Great Recession. Policymakers need to work hard to counter that perception before the next downturn hits.
President Barack Obama’s $800 billion spending plan is often criticized as having been ineffective. In reality, the plan played a crucial role in stemming a deepening economic slump, and if it fell short, it was because the aggressive one-time boost ultimately proved too small to counter the magnitude of the shocks at hand.
The fiscal boost during the latest expansion has been extraordinarily weak: Average annual fiscal impulse over five business cycles
|Peak-to-peak||3 years from trough|
Note: For each fiscal component (taxes, transfers, and government consumption and investment), the quarterly growth rate is multiplied by its share relative to overall GDP to get a quarterly contribution to growth. For taxes, this calculation is then multiplied by negative one—highlighting that tax cuts boost spending while tax increases slow spending. The figure shows these quarterly contributions expressed as annualized rates. Government consumption and investment spending is adjusted for inflation with the component-specific price deflator available in the NIPA data. For taxes and transfers, the price deflator for personal consumption expenditures (PCE) is used.
Source: EPI analysis of data from Tables 1.1.4, 2.1, 3.1, and 3.9.4 from the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis (BEA).
Speaking at EPI’s Next Recession event this past Thursday, Christina Romer, who was Chair of the Council of Economic Advisers during the crisis, asked “What made it possible to use fiscal policy so aggressively at that particular moment in time?”
“First, never underestimate the power of fear. The world economy really was imploding before our eyes,” she said.
Romer recalled the high-stakes crisis scenario she faced quite immediately upon taking office.
“I will never forget the first Friday of December in 2008 because I had been in DC as the designate for Council of Economic Advisers chair for all of a week when the employment report for November 2008 was released. And if you remember it, it was awful,” Romer said.
Not only had the economy lost a shocking half million jobs that month, which coincided with the height of the financial crisis on Wall Street, the prior two months showed downward revisions of some 200,000 jobs.
“All told that morning we learned employment was ¾ of a million jobs lower than we might have thought just the night before. And I remember it vividly because I was pulled out of a meeting—the president elect was still in Chicago, but I was pulled out of a meeting because he wanted to be briefed on the numbers by phone.
“I kept saying ‘Oh my God, this is awful, I’m so sorry, oh my goodness it’s a catastrophe, I just kept going,” Romer said. “Finally he stopped me he said, ‘Christy, it’s not your fault’—but wait for it—‘yet.’”
“That really drove home to me the sense of magnitude of what not only the country was facing but also that I was facing.”
A new EPI report finds that the constraints to dealing with an eventual next recession are likely to be political rather than economic.
Romer bemoaned the evaporation of a consensus about the need for fiscal stimulus during downturns.
“Even actions like extending unemployment insurance during a long downturn are now highly controversial,” Romer said. “It’s truly frightening.”