Romer: ‘It’s Aggregate Demand, Stupid’

Wall Streeet Journal ^ | April 17, 2010 | David Wessel

[reaganaut1]

Christina Romer, chair of the president’s Council of Economic Advisers, says the reason unemployment remains so painfully high is clear: It’s not the inadequacy or laziness of the workers or the long-standing mismatch between workers’ skills and employers’ needs. It’s the old-fashioned Keynesian diagnosis: Too little demand in the economy.

“The overwhelming weight of the evidence is that the current very high—and very disturbing—levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified,” Ms. Romer said in remarks prepared for a conference at Princeton University today.

It doesn’t have to be this way, she argued, essentially making the case for more government stimulus to help the economy. “We have the tools and the knowledge to counteract a shortfall in aggregate demand. We should be continuing to use them aggressively.” Her comments contrasted with a recent flurry of optimism among some forecasters that the recovery may turn out to be stronger than the lackluster one many anticipated. “We we are growing again, but not booming,” she said. GDP is rising at a solid pace, but not as quickly as after other severe recessions and not as quickly as it needs to.

...

So what’s the solution? More private demand is essential, she said, but government can do more than it is – and Congress should embrace everything the president has proposed and then some. “One targeted measure that is likely to be very effective is additional fiscal relief to the states,” she said.

[reaganaut1]

The same WSJ page highlights a story Unemployment Extension Adds Up to 99 Weeks of Benefits. It's the (dis-)incentives to work and hire, stupid (Professor Romer). I think microeconomics -- supply and demand curves -- is important, but a lot of macroeconomic theory is nonsense.

[BfloGuy]

The Keyniacs (and Romer is one) can't figure things out because they look at the economy backwards. Businesses have to expand -- therefore hiring labor -- before their precious aggregate demand can increase.

Supply creates demand -- not the inverse.

Stupid, stupid Obama regime.

[mlocher]

It doesn’t have to be this way, she argued, essentially making the case for more government stimulus to help the economy.

Anyone remember the unemployment--inflation charts that were in vogue during the Carter years? Economists drew a graph on a chart with the Ordinate (Y-axis) being unemployment and Abscissa (X-axis) being inflation. Prevailing wisdom was that this graph was stable and the Fed Reserve, through monetary policy, determined what inflation/unemployment point the economy operated on by setting interest rates.

Turned out there was another factor, and that was Fiscal policy. The greater the money spent by congress, the higher the graph migrated on the chart.

Adding more stimulus will make the inflation/unemployment curve worse.

We are doomed.

[Myrddin]

People don't spend money when there are unemployed or uncertain of continued employment. Likewise, those who are employed don't burn resources when a heavy tax burden is on the horizon. The looming tax increases are enough to keep everyone with both feet on the brakes. Government spending just adds to the debt and future tax burdens.

The healthcare bill, expiration of tax breaks from the Bush years, threat of amnesty for illegal aliens, threat of cap and tax, threat of forced unionization by the "Employee Free Of Choice Act" are all anti-business acts. There will be no recovery while the communists that are currently in power continue to press these issues.

Lets not forget the trashing of domestic energy development (oil leases) that drives up the price of oil and the cost of everything. The recent new legislation aimed at meat packing houses will likely put most of the small players out of business. Unions and environmental regulations will corral the big players.

[CapnJack]

There's not enough consum'in go'in on out there!

[griswold3]

I say we’re ‘oversupplied’.
We’re overweight in lots of ways. How many ‘Store and Locks’ do you see?

[Pontiac]

It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”

She is right about the demand for goods and services being suppressed and it’s effect on the groth of the economy.

But she is wrong about the cause and the solution.

The reason that demand is suppressed is uncertainty. The people are uncertain about the direction of the economy, the business people are uncertain about the future of taxes, interest rates and regulation policies of the government.

The people aren’t shopping and business is not hiring because the Obama government is dead set on changing all of the above.

If Obamaist want the numbers to improve make an announcement that no further changes will be forth coming.

If Obamaist want the numbers to improve drastically they should make an announcement that taxes will be cut and there will be a moratorium on new regulations.

[RoadTest]

” - - - the reason unemployment remains so painfully high is clear: It’s not the inadequacy or laziness of the workers or the long-standing mismatch between workers’ skills and employers’ needs.”

It’s the unpredictability of the erratic driver at the wheel of the economy in the White House. Business is afraid to make a move because they don’t know what cockamamy brainstorm is going to excrete out of him next.

[xkaydet65]

One problem Romer did not mention. American business has been forced to make do with fewer employees. These have maintained output levels. As business makes do with less, it will require much higher demand to increase the need for more workers.

[dawn53]

Likewise, those who are employed don't burn resources when a heavy tax burden is on the horizon. The looming tax increases are enough to keep everyone with both feet on the brakes. Government spending just adds to the debt and future tax burdens.

This is what's tempering our spending. Both of us have jobs that are as secure as reasonbly possible. We have no financial obligations, i.e. kids grown, dependent expenses like college are behind us, and we have what would be considered a good amount of disposable income. But are we spending it...no way since we have no idea of the fall out from the HCR (will my insurance rates go through the roof) and taxes (end of Bush tax cuts, high property taxes to compensate for falling revenue, etc.)

[Arthur McGowan]

Dear Ms. Romer:

Let’s try this experiment. Just print up ten million dollars, and send it to my house. I’ll let you know how it works out.

Thanks.