"Interview with Christina and David Romer"

This is from the Minneapolis Fed:

Interview with Christina and David Romer, Douglas Clement - Editor, The Region, September 2008: In times of financial turmoil, it is comforting—or at a minimum, illuminating—to receive counsel from those with long-term perspective. Tempered with the lessons of history, their views extract true trend from distracting noise. Guided by precedent, shaped by narrative, checked against data, the conclusions of economic historians are formed slowly and carefully.

In the realm of U.S. monetary history, few economists are as qualified to provide such counsel as Christina Romer and David Romer of the University of California, Berkeley. ...

The following conversation with the Romers covers this research as well as their work as co-directors of the monetary economics program of the National Bureau of Economic Research, their thoughts on asset prices as a focus of monetary policy, the benefits of research collaboration with one's spouse and, indeed, their perspective on current U.S. economic turmoil.

Taxes and Spending

Region: You recently wrote a very intriguing paper about the interplay between tax changes and government spending. Would you give us a brief description?

David Romer: Well, a major motivation that people have put forward for cutting taxes is their concern that government is too large. They think that the direct approach of going through the political process to cut spending is very difficult, and so the best strategy is to cut taxes. The idea is that this will reduce the revenues that Congress has available, and over time that will force spending down.

This is something that Ronald Reagan was very explicit about. It was one of the motivations for his tax cuts, and it goes under the name of the “starve-the-beast” hypothesis. The “beast” is government and its “food” is the revenues. Despite its importance, there's been very little empirical work on this, and most of that work boils down to looking at correlations: When revenues go up or down, do we later see spending move in the same direction? But a theme that runs through a lot of our work is that simply looking at correlation is often very misleading for getting at causation.

In the context of the starve-the-beast theory, my favorite example of the issue of correlation versus causation is the fiscal history of the Korean War. The North invaded the South at the end of June 1950. A month later Truman took a few minutes out from planning the military response and wrote to Congress to say that we needed a massive tax increase because we were going to have to ramp up military spending. A big tax increase was passed and put into effect three months after the invasion. We really hadn't succeeded in increasing military spending at all at that point.

So if you look just at the data, you see that taxes went up and spending went up afterwards. If you look at correlation, it looks like a great example of tax changes causing spending to change in the same direction. But if you listen to the history I just described, it's clear that, in fact, causation went from the decision to raise spending to the decision to raise taxes.

What we try to do in a lot of our work is bring in additional information from history to try to get at causation. In the paper on the starve-the-beast hypothesis, we go through the history of tax changes and take out the ones that are motivated by decisions that had already been made to increase spending, take out ones that are coming not from policy at all but from developments in the economy, and the like. We try to isolate changes in taxes that seem truly legitimate for testing the starve-the-beast hypothesis.

And what we find is no evidence for starve-the-beast. There's no systematic tendency for spending to fall after tax cuts relative to what it otherwise would have been. ...

Region: But you did find that tax cuts were followed by something else.

CR: Right. Tax cuts led, eventually, to tax increases. Basically, something has to give; there is a government budget constraint. ... A substantial fraction of a tax cut is typically undone in the subsequent five years.

Forecasting and the FOMC ...

Private Information ...

Evolution of Understanding

Region: ...You identified three distinct phases in that evolution, ending in the 1990s with a sophisticated model that seemed sensible. And you said this suggests "both a note of optimism and a note of caution about the future of stabilization policy." Would you describe those phases and elaborate on those notes?

CR: I'll start with the phases. There's a desire to think that we gradually learn things over time, and so we get gradually better and better policy. But, what we found was a more complicated evolution. We found that in the 1950s, policymakers didn't have a sophisticated model of the economy, but in its basics, it was actually pretty good. They had a sense that inflation was bad. They had a sense that there was a kind of capacity constraint to the economy, and that if you tried to push the economy too far, eventually you wouldn't get any benefits in terms of lower unemployment; all you'd get is inflation. It was a sort of proto-natural-rate kind of view. As a result, policy was also pretty good. It wasn't perfect—they were certainly doing the sort of "stepping on the gas, stepping on the brakes" that Milton Friedman always criticized—but overall, the basics were pretty good. Inflation was kept in check and recessions were brief.

Then what we see is deterioration in the 1960s and '70s. In the process of trying to add better analytics, policymakers in fact took a giant wrong turn in understanding how the economy operates. They first had the idea that there was a permanent trade-off between inflation and unemployment, so if we were just willing to have more inflation, then we could permanently lower unemployment.

That view disappeared pretty fast, but then policymakers replaced it with a natural rate of unemployment view where they thought the sustainable level of unemployment was, maybe, 3 percent. Then we see Arthur Burns in the early 1970s struggling with the fact that that didn't seem to be right. So he added the idea that maybe monetary policy just can't do anything—that inflation doesn't respond to slack. So another twist and turn, but a wrong turn. Policy in this period reflected these views-it was wildly overly expansionary most of the time, with a few half-hearted monetary contractions aimed at controlling inflation thrown in.

Not until the Volcker, Greenspan and now Bernanke era do you get a basically pretty sensible model—the view that inflation is bad, the sustainable rate of unemployment is moderate and inflation will respond to slack.

Region: You call it “sensible and sophisticated.”

CR: This is in contrast with the 1950s, which was sensible but clearly crude. The modern framework has a lot of sophisticated features that policymakers in the 1950s didn't have. The important thing is that these sensible views have led, by and large, to moderate, well-tempered policy. The result has been low inflation and remarkably steady growth over the past 25 years.

Region: And your notes of caution and optimism?

DR: The optimism is to say that we've now had monetary policy run on a very sound basis for 25 years. I think we're both pretty strongly of the view that the Great Moderation—the excellent performance of the U.S. macroeconomy over the last quarter century—is not just luck. A big part of it is improvements in the conduct of monetary policy related to improvements in economic understanding. That's the optimistic note, that maybe good ideas and good policy can continue.

The note of caution is that we haven't had a monolithic march toward better and better knowledge. So if people get complacent and start appointing people who have misguided ideas to the Federal Reserve, we can have a backsliding.

CR: Another wrong turn.

DR: Yes, another wrong turn in how policy is conducted. And so that's something we have to be vigilant about. We have to think about ways to ensure that monetary policy is consistently run on the basis of the best available ideas about how the economy works.

Theoretical Progress

Region: From my reading of the symposium proceedings, it seemed there was a fair amount of criticism from the discussant [NYU economist Thomas Sargent] and others, saying among other things—and I'm from Minnesota so I have to bring this up—that your analysis left out major theoretical advances, such as rational expectations and the time inconsistency problem, among others.

Is it your view that these theoretical advances don't have much of a role in improved policy?

CR: I think our view is that to understand what went on in U.S. macro history, these things aren't crucial. Issues of credibility and rational expectations surely can matter and surely are something that any good monetary policymaker should be thinking about. But in terms of explaining why policy went so astray in the early 1970s, it wasn't time inconsistency, it wasn't failing to take credibility into account. It was Arthur Burns saying things like, "Monetary policy can't do anything." So in terms of the source of the big policy mistakes, we think that's not the best place to look.

The paper I'd cite that I think is very supportive of this comes very much from a rational expectations learning tradition. It's by [Northwestern University economist] Giorgio Primiceri in the 2006 Quarterly Journal of Economics. It uses a sophisticated "Sargent-esque" learning model, but finds that learning about just a few variables-the estimates of the natural rate and the sensitivity of inflation to deviations from the natural rate-can explain the evolution of policy and outcomes incredibly well. So again, I think it's an empirical issue, not a theoretical or methodological issue.

DR: The other example I would add besides the one of what went wrong in the 1970s is what finally went right when Volcker came in. The crucial thing was that Volcker had a much more sensible view of how the economy operated, and he took actions consistent with those views. He said, in effect, "Okay, look, we have to get inflation down. Monetary policy is capable of doing that. The natural rate of unemployment is pretty substantial, so to reduce inflation we're going to have very tight policy and the unemployment rate is going to have to go quite high."

As things turned out, it was actually less costly to bring inflation down than most economists had expected, and a likely reason is that at some point people started to realize that the Fed was really serious. The Fed gained some credibility, and so you didn't have purely mechanical backward-looking expectations. You got kind of a credibility or rational expectations kick.

So if you want to describe the very big picture of what happened, rational expectations isn't central. But if you want to get into a quantitative account and match the numbers, then that becomes something to consider. So, it's on the list, but it's not one of the top ones for the period we were looking at.

A Fourth Phase?

Region: It's too early to write our history about the current period, of course, but people are again talking about stagflation, and I guess it comes to a question of, What have we learned after all? Is the Great Moderation over? Have we entered a fourth phase?

CR: The key question is what happens from here. For the Great Moderation, we believe that good policy was a crucial part. But another thing that a lot of the studies have found is that during the Great Moderation, we didn't have big shocks. For example, we didn't have a lot of oil price shocks.

We're now in a nasty period. Ben Bernanke has been dealt just a rotten hand; there are awful shocks hitting the U.S. macroeconomy. The issue is going to be, What do we do from here? There's no way, confronted with some of these things, that you can have low inflation and 4 percent real growth every year.

What we don't have to do is what they did in the 1970s, which is to compound bad shocks with bad policy. The Fed ran massively expansionary monetary policy at a time when conditions didn't warrant it. The result was very high inflation, followed by massively high unemployment to get it down.

So I think the real question is going to be, What's the line we walk from here? Think about the action we saw just today [June 25], where the FOMC didn't keep lowering the federal funds rate. It said, "We're probably through the worst in the financial markets; we had to fight that fire, but now we're going to look at what's happening to inflation. There are benefits to low inflation, and so we're going to have to think about how much we stimulate the real economy and how much we're concerned about inflation." The fact that the FOMC is thinking this way suggests that even if they don't do everything exactly right, they're not going to make the sorts of huge mistakes policymakers made in the 1970s.

Asset Prices

Region: It's long been Fed doctrine that we really don't have the ability to identify asset price bubbles with great accuracy, nor address them with alacrity. But given the housing market, the dot-com bust—given much of this past decade, I guess—some policymakers are reconsidering whether asset prices should be a focus of Fed policy. What is your view?

DR: I've always been of the view that it's very hard to identify an asset price bubble, and I don't think the Fed should be in the business of trying to determine what fundamental values are. A nice concrete example of this is that when Alan Greenspan gave his famous irrational exuberance speech, the Dow-Jones average was at something like 6,000; it eventually fell, but it had risen a great deal more before it fell. So in retrospect it looks like 6,000 was not too high for the Dow at that time.

I think the bigger issues are that rapid run-ups in asset prices, first of all, tend to stimulate the economy a lot, and secondly, can be followed by declines. So it might be best to think not in terms of trying to manage asset prices or identify fundamental values, but rather that rapid increases in asset prices are another indicator of potential overheating that the Fed might want to consider in how it conducts policy. To me that makes sense.

I think it's really framing the issue in a confusing way to try to focus on the question of the Fed directly managing asset prices or trying to have its own view of what fundamentals should be. I think that's not where the Fed should be. But I think they should still be thinking pretty hard about asset markets.

CR: I like David's point about big rises in asset prices as an indicator that maybe the economy is too hot, or that they're one of the things that you should look at. In thinking about the Greenspan era, there's a tendency for people like [former Fed Governor] Larry Meyer to say, "Oh, Alan Greenspan was so much smarter than I was because he realized that the unemployment rate could go down to an incredibly low level."

I'm not sure that's right. In some sense maybe we were taking things too far. Being aggressive in seeing just how good we can make things in the short run might be setting up these kinds of bubbles. I think we might want to take rapid asset price increases as one indication that we should be following a more moderate policy.

Choosing a Chair ...

NBER and Monetary Economics ...

Collaboration ...

Separate Pieces

...Region: ...your recent presentation to the Economic History Association on macro policy in the 1960s, ... I found it ... interesting. Would you tell us about it?

CR: That paper built on the work we did on the "Evolution of Economic Understanding," but added some of what we were learning from our new work on fiscal policy. ...

The question I focused on was, What went wrong? And the answer is, Basically, bad ideas. There was a revolution in ideas, but it was a misguided revolution. ...

The thing I added in this paper was the long-run fiscal side. We not only had a revolution in our views about how the macroeconomy works in the short run, but also a change in views about the importance of long-run budget balance. The paper looked at how that evolved.

What's very striking is that we had a pretty sensible long-run fiscal view in the 1950s—the budget should be balanced over the medium run, but not each and every year and not in exceptional circumstances. And, policy choices reflected that view-the budget was balanced on average, but not in recessions and not during wars.

But views took an unfortunate turn in the 1960s and '70s. Policymakers started to believe that budget balance was not important even over an extended horizon, and that tax cuts would pay for themselves. And views took another wrong turn in the 1980s, when policymakers added notions such as the starve-the-beast hypothesis that tax cuts would force spending cuts. I think these are wrong turns that we haven't corrected yet—as evidenced by our ever-worsening long-term fiscal outlook. That's the big picture that came out of this study.

Region: Thank you both very much.

Comments

[John Wycliffe]

Has policy really improved? Or has imflation moderated simply because, overall, wages for most people stopped increasing at about the time the "great" moderation began?

Krugman has pointed out that the lack of union contracts has made the inflationary spiral of the 70s unlikely to recur.

So doesn't this imply that we have moderated the business cycle on the backs of the working class?

If not, why not? I apologize in advance for any ignorance, but I'm not an economist, nor do I play one on TV.

[Yes]

"Or has inflation moderated simply because, overall, wages for most people stopped increasing at about the time the "great" moderation began?"

IMHO, yes. The funds for operations have to come from someone. The Fed cannot currently tax the rich, it can only extract resources from the inflation vulnerable entities. This generally means the bottom 95%, as the very rich can hire managers to hedge their holdings for them. If the Fed has 1 trillion on its balance sheets, that one trillion in purchasing power had to be extracted from someone. Workers wages stagnated, and retired workers lost ground to inflation. The purchasing power was transferred from workers/retirees to the Fed, which then in turn transferred it to borrowers in the form of subsidized below market interest rates.

If most workers/retirees get COLAs, this causes a stagnating wage/price spiral, as the Fed is forced to create ever more money to get the same purchasing power from the remaining inflation vulnerable entities.

[bakho]

Interesting, but there are some major pieces missing from the model he describes.

The political ability of workers to demand higher wages has almost disappeared as the first two posts describe. The Living Wage battle is going nowhere. It is 10 years between increases in the minimum wage. Overall compensation is eroding much faster because so many workers are either paying more out of pocket for benefits or losing benefits altogether.

Another missing piece is commodity prices and energy shocks. Monetarists like to trumpet Volcker policy for beating inflation. Realists point to Carter as the first (and only) administration to create a serious energy policy that actually reduced oil demand through efficiency and conservation. There were zero comments about the effect of dropping energy prices through the period of economic recovery following Volcker. Is there a link between high interest rates and low energy prices? Monetary models treat energy shocks by not including energy in core inflation.

Because the Fed has no role in fiscal or energy policy, many economists avoid discussing the economic implications of energy policy. Energy demand, especially oil demand that approaches output leads to oil price spikes. How hard is it for economists to warn that alternative energy, efficiency and conservation measures need to be in place to prevent an oil shock? Economists very accurately predicted the $4 price of gasoline last summer during the winter of 2007. Not having a mechanism to manage energy policy to prevent oil shocks does not mean that economists should avoid models that predict those shocks. In fact, the ability to predict oil shocks could and should be used as a weapon against energy lobbyists who actively undermine attempts to prevent oil shocks.wwww

Odd that he beats up on the low unemployment rate during the 90s as a factor in overheating the economy. What about the role of deficit spending in the face of an economic boom. Isn't that a bad idea? Or is he afraid to criticize Newt Gingerich and the No New Taxes Republicans for their failure to increase taxes to bring the budget back into balance. In fact, taxes seem to be missing from the model. As revenues rose to over 20% of GDP in the late 90s, did the Fed consider the braking effect that high revenue was having on the economy? Or did the Fed resent fiscal policy putting on the brakes and collecting a surplus that would pay down the deficit? In any event, the Fed piled on with high interest rates in the face of anti-inflationary fiscal policy that was collecting surplus.

With regard to bubbles, there is no mention of the regulatory functions of the Fed and no model for how the Fed might use regulatory intervention to address bubbles that are becoming too large. For example, the Fed could have addressed the housing bubble by requiring more down payment on loans, greater capital requirements by mortgage holders and adjusting the lending requirements to assess housing values according to trend rather than bubble. Thus a house at $200K trend would only be allowed $180K in loan and not a $270K loan on a bubble price of $300K.

For the stock bubble of the 90s, more transparency in accounting could have been imposed to allow investors to better evaluate the offerings.

A lot of the economic problems are the result of a hands off philosophy that fails to address core issues with the market that economists have written about for years. Asymmetric information, transparency, risk, regulatory tools and communicating the effects of fiscal policy on monetary policy are left off the table. A narrow-minded focus on money supply manipulation is not sufficient for good economic policy. Reliance on a blunt monetary tool to bludgeon the economy when parts of it get too hot leaves too many of the finer focused tools locked in the toolbox. Allowing an administration to limp with a dysfunctional fiscal and regulatory policy that is cripples the economy is unacceptable.

If the voters continue to elect politicians and support political parties with dysfunctional economic policies, then we will see the markets shift to other countries that are more functional. We already see this happening in the recent crisis. Gordon Brown is calling for international rules and international as a solution to the dysfunction that has been allowed to develop in the US.

".. we must have stronger international rules for transparency, disclosure and the highest standards of conduct. Successful market economies need trust, which can only be built through shared values."
"..national systems of supervision are simply inadequate to cope with the huge cross-continental flows of capital in this new, ever more interdependent world. I know that the largest financial institutions will welcome the proposed colleges of cross-border supervisors that should be introduced immediately. "

The failure of economic policy in the US insures that policy going forward will be increasingly governed by international rules.

[hari]

Bakho - succinct and to the point.

[hari]

It's globalization which economic policy and its framework of decision-making must put right up centre, if things are going to change - going forward.

[Bruce Wilder]

David Romer: "We found that in the 1950s, policymakers didn't have a sophisticated model of the economy, but in its basics, it was actually pretty good. They had a sense that inflation was bad. They had a sense that there was a kind of capacity constraint to the economy, and that if you tried to push the economy too far, eventually you wouldn't get any benefits in terms of lower unemployment; all you'd get is inflation. It was a sort of proto-natural-rate kind of view. As a result, policy was also pretty good. It wasn't perfect—they were certainly doing the sort of "stepping on the gas, stepping on the brakes" that Milton Friedman always criticized—but overall, the basics were pretty good. Inflation was kept in check and recessions were brief."

This paragraph illustrates both what I find disturbing about the Romers' preferred historical narratives, and about the Federal Reserve Banks' eagerness to subsidize right-wing hackery.

Policy in the 1950's was most definitely not sensible. It refused to accept the Keynesian revolution, and, instead of realizing the economy's potential, policy created two recessions. It doesn't matter that they were "brief"; the expansions were also brief, because the recessions came on so frequently; in terms of the situation of the real economy, they were completely unnecessary, and they served to preserve a significant fraction of the population in appalling poverty, when many of the poor could have been drawn into and employed productively in an expanding, modern, highly productive economy.

Then what we see is deterioration in the 1960s and '70s. In the process of trying to add better analytics, policymakers in fact took a giant wrong turn in understanding how the economy operates. They first had the idea that there was a permanent trade-off between inflation and unemployment, so if we were just willing to have more inflation, then we could permanently lower unemployment.

That view disappeared pretty fast, but then policymakers replaced it with a natural rate of unemployment view where they thought the sustainable level of unemployment was, maybe, 3 percent. Then we see Arthur Burns in the early 1970s struggling with the fact that that didn't seem to be right. So he added the idea that maybe monetary policy just can't do anything—that inflation doesn't respond to slack. So another twist and turn, but a wrong turn. Policy in this period reflected these views-it was wildly overly expansionary most of the time, with a few half-hearted monetary contractions aimed at controlling inflation thrown in.

The two paragraphs above are wall-to-wall, right-wing hackery. First of all, he disappears from the narrative the Kennedy-Johnson CEA -- a panel of Keynesian stars, who did what Eisenhower refused to do, and who bullied McChesney Martin into doing the right things, resulting in the longest peacetime expansion on record. (Clinton would beat that record.) It was an expansion, which, not incidentally, also saw very substantial reductions in poverty.

And, the Kennedy-Johnson policymakers did not abandon the idea of long-run budget balance in an erosion of sensible policy ideas. They got into an epic fight, with McNamara over the escalation of Vietnam War spending. Johnson raised taxes, too late because McNamara lied about spending. The result was the 1967 credit crunch, but also a 1969 budget in balance. (I can testify from my experience as his student, that Gardner Ackley was adamant that the Phillips Curve did not represent a theoretically sound relationship.)

Romer, having disappeared the highly successful Kennedy-Johnson CEA, and squashed 1960's policy (which, in real life was nearly ideal) into 1970's policy, then compounds his error by giving Arthur Burns an intellect. Burns, in Romer's narrative, is struggling with ideas, not Richard Nixon. Very pleasant to hear, if you are a right-wing Republican with a cushy job at a Federal Reserve bank, but not the truth. Nixon's ruthless pursuit of re-election and the ceiling of resource constraints on a global economic expansion might have had something to do with what happened.

Not until the Volcker, Greenspan and now Bernanke era do you get a basically pretty sensible model—the view that inflation is bad, the sustainable rate of unemployment is moderate and inflation will respond to slack.

Region: You call it “sensible and sophisticated.”

CR: This is in contrast with the 1950s, which was sensible but clearly crude. The modern framework has a lot of sophisticated features that policymakers in the 1950s didn't have. The important thing is that these sensible views have led, by and large, to moderate, well-tempered policy. The result has been low inflation and remarkably steady growth over the past 25 years.

They say historians imagine the past and remember the future. Somehow, in the midst of the greatest financial crisis since the Great Depression, created by the "moderate, well-tempered" policy of Greenspan and Bernanke, Romer's judgments don't look so well-considered.

[OhNoNotAgain]

Uh, did they just paper over the role that Greenspan has had in the last two giant bubbles in our economy in a brief span of 10 years ? I would call what we've experienced a lot of things, but a "time of moderation" would not be a description that I would use.

[esb]

The "Great Moderation" of Mark Gertler turns out to be nothing but the result of an unprecedented expansion of the shere of GDP represented by finance.

That insane game is now over.

[spencer]

What he completely ignores is the "starve the beast" does not hurt governments. We have seen that over the last quarter century.

what starve the beast does is hurt the private sector.

Starve the beast is a policy of cutting off your nose to spite your face.

We are seeing that in spades right now.

[Bruce Wilder]

I'm sure policy did evolve, and maybe it even got better. But, the history cannot just be a highly selective narrative, that leaves out, or whitewashes the political history.

In 1960, the consensus view, arguably, was that fiscal policy dominated a relatively passive or reactive monetary policy. After 1980, I daresay, the consensus view reversed, and monetary policy was viewed as dominant.

Was this an evolution of ideas? Or, a lesson of political experience?

At the end beginning of the Kennedy Administration, it was surprisingly hard to get Congress to adopt an expansionary fiscal policy, and at the end of Johnson's term, even harder to enact necessary tax increases in a timely way. And, the leading policymakers in the Administration were in earnest.

By the time Reagan came along, fiscal policy was in the hands of ruthless liars. (Do you suppose Romer's career could survive noting that David Stockman confessed to lying? If not, what kind of history is he writing? For whom?) The political discourse on fiscal policy was being polluted by the likes of Laffer and the Wall St Journal editorial page. Meanwhile, monetary policy was in the hands of Paul Volcker, who pushed through a policy, which, even in retrospect, I can hardly believe was politically feasible.

From that political experience with relative integrity and feasibility, monetary policy became dominant, not from any great theoretical revolution.

The creation of a full-time right-wing idiots' chorus propagandizing for tax-cuts for the rich has polluted all subsequent discussion in the public square, further limiting the political feasibility of sensible fiscal policy. Just in the last couple of weeks, we've seen the Presidential candidates act like deer caught in the headlights, when asked how the costs of the bailout might affect their spending plans in their first year.

In a country, where the Media was not brain-dead and in-the-tank for the worst elements of the plutocracy, the two of them could have competed to promise what the country will actually need, which is massive Federal spending. But, the obvious premises of the moderator, in asking the question, as well as the presumable prejudices of much of the audience, precluded that.

As Dean Baker wrote: "I have always said that we do not have to worry about another Great Depression because we know how to get out of one now. (it's simple -- spend money.) The problem is that 'we' may not be the ones deciding policy."

I really worry, when a respected historian, speaking to a mostly professional audience, is able to pass off cartoonish simplifications, like "Not until the Volcker, Greenspan and now Bernanke era do you get a basically pretty sensible model—the view that inflation is bad, the sustainable rate of unemployment is moderate and inflation will respond to slack." 'Inflation is bad'?!? That's the "sensible model"? Are you kidding me?

Most economists don't know squat about economic history, and don't really want to know anything. They are trained in manipulating a basically stateless equilibrium model, and desperately want to discard the burden placed on the models by the reality of micro-path-dependence. With the greatest reluctance, they might be willing to absorb highly distilled, stylized facts about the past, but they want those stylized facts to be "generalizable", few in number, have clear narrative implications, be heavy on the technocratic economics and light on the messy politics. And, more than anything they want it wrapped in plutocratic-friendly narrative frames. And the Romers are delivering what the market demands. But, it is a great disservice.

There is a history, here, waiting to be written. Central bank policy has evolved and changed its character markedly at distinct points. There's been a struggle, between the political Parties over income distribution, which should not be ignored or minimized -- it is an integral part of the political history, with practical implications for economic performance.

[Winslow R.]

"In the realm of U.S. monetary history, few economists are as qualified to provide such counsel as Christina Romer and David Romer of the University of California, Berkeley. ..."

Add in Brad,
Strike 3

[flubber]

The Romers do address the Greenspan bubbles - saying that the Fed could factor asset prices into their inflation measures. And that perhaps Greenspan went too far, by pushing to see "how good things could get" in the inflation/unemployment tradeoff, by goosing the economy with too-low interest rates, while ignoring the inflation appearing in the stock market, then home prices.

Nice comments by bakho and Bruce. I agree with the above that the Moderation has been contingent on at least 3 things:

(1) at least 80% of the workforce seeing stagnating wages for about 30 years - 30 years of productivity and growth captured by the top 5% and corporate profits.
(2) Significant expansion of trade with countries which were recently much poorer, and were, finally, the recipients of massive technological diffusion. Currency policies by China, Japan, other Pacific rim countries contributed to the low inflation in the US - cheaper imports, stronger USD.
(3) Trickery/difficulty in measuring inflation/growth. Hedonic adjustments, increasing rates of capital obsolescence, service-sector expansion, etc. Growth has been, IMO, less than reported, inflation higher.