In early March 2008 I wrote an open letter to the President:
I pointed out that Christine Romer understood the importance of monetary stimulus in the Great Depression, and predicted that she would recommend aggressive monetary stimulus in this crisis as well. I doubt he ever talked with her, as he didn’t even bother filling empty Fed seats. At the time most progressives were ignoring monetary stimulus, and focusing almost entirely on fiscal stimulus.
Now we know I was right, Christine Romer does think that monetary stimulus is crucial:
“We need to realize that there is still a lot of devastation out there,” Romer said, calling the 8.9% unemployment rate “an absolute crisis.”
“If I have a complaint about policy these days, it’s that we’re not doing enough,” she said. “That goes all the way up to the Federal Reserve, [which] could be taking more aggressive action. It goes to the Congress and the Administration – there are fiscal policy actions they could be taking.”
“And don’t tell me you can’t [take those actions] because of the deficit because I think there are fiscally responsible ways,” she said.
Romer suggested that extending the payroll tax break to the employer side of the payroll tax could spur the economy;
The employer-side payroll tax cut is a good way of offsetting wage stickiness, and is an idea I have often advocated. Monetary stimulus combined with an employer payroll tax cut would be a powerful one-two punch.
Why didn’t he talk to Romer? I suspect that Larry Summers blocked access.
HT: Matt Yglesias
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Update 3/25/11: Alex Tabarrok sent me an even better quotation from Romer:
One thing I had the class read was Ben Bernanke’s 2002 paper on self-induced paralysis in Japan and all the things they should’ve been doing. My reaction to it was, ‘I wish Ben would read this again.’ It was a shame to do a round of quantitative easing and put a number on it. Why not just do it until it helped the economy? That’s how you get the real expectations effect. So I would’ve made the quantitative easing bigger. If you look at the Fed futures market, people are expecting them to raise interest rates sooner than I think the Fed is likely to raise them. So I think something is going wrong with their communications policy. They could say we’re not going to raise the rate until X date. Those would be two concrete things that wouldn’t be difficult for them to do. More radically, they could go to a price-level target, which would allow inflation to be higher than the target for a few years in order to compensate for the past few years, when it’s been lower than the target.