In a farewell speech given yesterday, Christina Romer said that the United States averted a depression thanks to actions taken by the Obama Administration:
Christina Romer, the departing chairman of President Obama’s Council of Economic Advisers, is to say in a farewell speech today that the administration’s responses to the economic crisis it inherited averted “a second Great Depression” and kindled a slow recovery, according to excerpts released on Wednesday morning by the White House.
Ms. Romer’s last day as a member of Mr. Obama’s economic team, and its only leading woman, is Friday, which coincides with the release of unemployment figures for August that are expected to show joblessness still hovering above 9 percent. And she returns to California in a campaign season in which Republicans insist, and many voters believe, that administration policies have failed, despite nonpartisan analyses to the contrary.
“I am proud of the recovery actions we have taken. I believe they have made the difference between a second Great Depression and a slow but genuine recovery,” Ms. Romer will say, according to her speech draft. “And the passage of health care reform and financial regulatory reform are accomplishments that will be with us long after the recession is over.”
As the Wall Street Journal noted back in July, there is no way to know what would have happened without the bilions upon billions of “stimulus” dollars pumped into the economy, which haven’t done much other than drive up budget deficits:
As was predicted last year, Cash for Clunkers, the government sponsored program that gave consumers a credit for their trade in when they bought a new car, has distorted the used car market by driving up the price:
Car buyers on average paid $1,800 more for a used vehicle in July than they paid a year ago at this time, according to Edmunds.com data. That’s a 10.3 percent increase, bringing the average cost of a 3-year-old vehicle to $19,248. The price of a Cadillac Escalade spiked nearly 36 percent. “A lack of confidence in the economy is driving more people to used cars, putting upward pricing pressure on a limited supply of vehicles,” said Joe Spina, a senior analyst for Edmunds.
There’s a tricky aspect to this analysis, because last summer was marked by a used-car buying frenzy spawned by the Cash for Clunkers program. Spina said the effects of that program are hard to isolate precisely. “So many economic factors affect automobile sales and prices. It’s believed that the program delayed purchases prior to the program and also pulled sales forward while in place,” he said. “The program also eliminated inventory of older vehicles that were traded and then scrapped.” After the jump, take a look at the vehicles whose prices moved the most this July. The model years have been averaged. You can also get some advice on how to proceed in a (relatively) pricey used-car market.
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” - F.A. Hayek
Thomas Hoenig, Chairman of the Kansas City Federal Reserve, is cautioning his colleagues about the central bank’s use of monetary policy:
A lone dissenter on the Federal Reserve’s policy-making committee warned Friday that the central bank’s monetary strategy could backfire and touch off a new boom-and-bust cycle.
Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, dissented on Tuesday when the Federal Open Market Committee voted 9 to 1 to invest proceeds from the Fed’s mortgage-bond portfolio in longer-term Treasury debt. The decision was the Fed’s clearest signal yet that its confidence in the pace of the recovery was waning.
“Monetary policy is a useful tool, but it cannot solve every problem faced by the United States,” Mr. Hoenig told local Chamber of Commerce members in a speech at the University of Nebraska, Lincoln. “In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long.”
Mr. Hoenig added: “I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no shortcut.”
This debate has gone on for decades, but what a better way to explain it than the “Fear the Boom and Bust” video from EconStories:
Though it’s not the highest number on record, the deficit for the month of July was $165 billion, according to the Wall Street Journal:
Federal spending eclipsed revenue for the 22nd straight time, the Treasury Department said Wednesday. The $165.04 billion deficit, while a bit smaller than the $169.5 billion shortfall expected by economists polled by Dow Jones Newswires, was the second highest for the month on record. The highest was $180.68 billion in July 2009.
The government usually runs a deficit during July, which is the 10th month of the fiscal year. So far in fiscal 2010, the government spent $1.169 trillion more than it made. That figure is about $98 billion lower than during the comparable period a year earlier.
For all of fiscal 2009, the U.S. ran a record $1.42 trillion deficit. Fiscal 2010 might run a little higher—the Obama administration sees $1.47 trillion.
And there is no end in site:
Speculation broke that last night that Christina Romer, the White House chief economic advisor, plans to leave the Obama Administration:
Romer, an economics professor at the University of California (Berkeley) before taking the key admin post, did not respond to repeated calls to her office.
“She has been frustrated,” a source with insight into the WH economics team said. “She doesn’t feel that she has a direct line to the president. She would be giving different advice than Larry Summers [director of the National Economic Council], who does have a direct line to the president.”
“She is ostensibly the chief economic adviser, but she doesn’t seem to be playing that role,” the source said. The WH has been pounded for its faulty forecast that unemployment would not top 8% after its economic stimulus proposal passed.
Instead, the jobless rate is 9.5%, after exceeding 10% last year. It was “a horribly inaccurate forecast,” said Bert Ely, a banking consultant. “You have to wonder why Summers isn’t the one that should be taking the fall. But Larry is a pretty good bureaucratic infighter.”
Romer was one of the architects of President Barack Obama’s stimulus program, which was the first step in Democrats effectively taking ownership of the economy.
President Barack Obama and his economic advisors claimed that this spending would keep unemployment under 8% (pg. 5), claiming that it would rise to 9% without such action. As of today, the unemployment rate sits at 9.5%.
With the economy expected to continue its sluggish pace as we head into 2011, some economists believe that the expiration of the Bush tax cuts will hurt the economic recovery:
The nascent US economic recovery would be halted in 2011 if Congress fails to extend the Bush tax cuts for the wealthiest Americans, analysts at Deutsche Bank said.
The cuts were enacted in 2001 and 2003 under President George W. Bush and covered those earning more than $250,000, but they are set to expire at the end of this year.
Deutsche said the drag on gross domestic product should they lapse could be as much as 1.5 percent, with the more likely impact at 1.1 percent.
The impact would be worse, the analysts said, if Congress fails to fix the Alternative Minimum Tax, which was enacted in 1969 to make sure rich people pay taxes but was never indexed for inflation, and thus is now hitting middle-income workers.
“In a worst-case scenario, allowing the Bush tax cuts to expire and failing to fix the AMT could result in (1.5 percent) of fiscal drag in 2011 on top of the 1 percent fiscal drag we expect to occur as the Obama fiscal stimulus package unwinds,” Deutsche said in a note to clients. “If the recovery remains soft/tentative through early next year, this additional drag could be enough to push the economy to a stalling point.”
Deutsche compared the situation to Japan in the 1990s, when the government let tax cuts expire and cut stimulus, leading to another leg down in the recession and ensuring the nation’s “lost decade” of no economic growth.
Rep. Paul Ryan (R-WI) appeared on Hardball on Monday and discussed taxes, the debt and spending cuts with Chris Matthews, who demagogues tax cuts, and wound up giving him a lesson on economics:
Yesterday, the Senate passed yet another extention of umployment benefits, breaking through a Republican filibuster. President Barack Obama could sign the extention into law as soon as today.
With this, the Wall Street Journal wonders if we’re encouraging this behavior by not prolonging these payouts:
In the immediate policy case, Democrats are going so far as to subsidize more unemployment. If you subsidize something, you get more of it. So if you pay people not to work, they often decide … not to work. Or at least to delay looking or decline a less than perfect job offer, holding out for something else that may or may not materialize.
The economic consensus—which includes Obama Administration economists in their previous lives—couldn’t be clearer on this. In a 1990 study for the National Bureau of Economic Research, labor economist Lawrence Katz found that “The results indicate that a one week increase in potential benefit duration increases the average duration of the unemployment spells of UI recipients by 0.16 to 0.20 weeks.”
A March 2010 economic report by Michael Feroli of J.P. Morgan Chase examined several studies and concluded that “lengthened availability of jobless benefits has raised the unemployment rate by 1.5% points.”
Common sense economics doesn’t make for popular policy, but ignoring your own PAYGO rules, pushing the deficit higher does.