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Christina Romer, Stimulus Was Not Big Enough

By Brandon Hamilton '10

Christina Romer, former chair of President Obama's Council of Economic Advisors, argued before a packed crowd at Reed College that the federal government should increase stimulus spending to accelerate the country's meager economic growth.

"The truth about the state of our current crisis is such that the choices we make in the next few years may well determine whether we remain a great country or begin a decline," said Romer, who spoke in Vollum lecture hall on November 17.

According to Romer, the biggest choice before Congress is between increasing government spending to jump-start the sluggish recovery and tightening the budget to signal the government's ability to pay back the national debt.

Further spending would come on top of the $814 billion stimulus bill passed in 2009, and ratchet up the ratio of federal debt to the nation's gross domestic product, which already hovers near 65% according to the Congressional Budget Office. This level of indebtedness increases the likelihood of another crisis, said Romer.

The question still remains: is the economy's growth sustainable without further stimulus? In its November meeting, the Federal Reserve revised 2010 growth rate projections downward from 3 to 3.5% in June to 2.4 to 2.5%. Meeting minutes reveal the Fed's uncertainty that this weak growth rate could weather negative economic shocks going forward.

There are strong advocates on both sides. The influx of fiscally conservative representatives in Washington has turned up the volume on calls for a balanced budget to allay fears that the U.S. will default on its debt. If not addressed, such worries could cause investors to pull money out of the country and leave the dollar in shambles.

How does the U.S. debt-to- GDP ratio of 65% stack up against other countries? According to CIA estimates, China (17%) and Sweden (41%) are at the low end of the spectrum, while Greece (113%) and Japan (192%) are at the high end. It's no comfort that Greece required a massive European Union bailout in May to prevent it from defaulting on its debt.

Romer argued that congressional calls for less federal spending would cost the economy jobs in the short run, citing a recent study of 15 countries that showed a correlation between fiscal austerity and lower growth rates.

"We need more fiscal stimulus in the short run, not less," she said. "You'll see that I'm just as concerned with the deficit as anyone, but even from a deficit point of view, I think getting the unemployment rate lower is the priority."

Romer offers a potential solution to the impasse: do both. She believes policies that stimulate growth should be paired with others that reduce the deficit. For instance, a payroll tax break would give new businesses an incentive to hire more workers, who in return would add to the tax rolls. Simultaneously, a reduction in social security benefits could more than make up for the lost payroll revenue.

"Deficit reduction is both painful and possible," she said.

Romer answered questions about her expertise on the Great Depression and the politics of policy making in an hour-long reception with students before her speech.

Andrew Jalil, assistant professor of economics at Reed, and a former student of Romer's, led the push to bring her to campus. "It was a great turnout and students asked her a whole variety of things on current macroeconomic questions," he said.

Romer served on the Council of Economic Advisers from January 2009 until September 2010, and now serves as a member of Obama's Economic Recovery Advisory Board.