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Saturday, April 17, 2010

"It’s Aggregate Demand, Stupid"

I've been worried that the administration is overselling the recovery, setting expectations high and then under delivering is not the formula for success. So it's good to see Christina Romer saying that we're not out of the woods yet, and that the economy could still use more help:

Romer: ‘It’s Aggregate Demand, Stupid’, by David Wessel, RTE: 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. As a result, the unemployment rate remains painfully high and is not predicted to reach normal levels for an extended period.” The jobless rate, at last report, was 9.7%. ...
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. Another is putting money into smaller banks, as the president has proposed, to get them to lend more to small and medium sized firms. A third is more aggressive actions to open foreign markets to U.S. goods and services.

“Things are better,” she said, “but they are not nearly good enough. We are painfully far from normal.”

It's also good to see her taking on the "lazy worker" explanation for high rates of long-term unemployment.

    Posted by on Saturday, April 17, 2010 at 10:17 AM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (72)


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