Christina Romer Defends Fiscal Stimulus

by Chris Sturr | March 11, 2009

Romer is chair of the president’s Council of Economic Advisers (and an economic historian at Berkeley). In a talk at the Brookings Institution on Monday, she took on the crowd claiming that Keynesian fiscal stimulus policies failed in the 1930s:

I wrote a paper in 1992 that said that fiscal policy was not the key engine of recovery in the Depression. From this, some have concluded that I do not believe fiscal policy can work today or could have worked in the 1930s. Nothing could be farther from the truth. My argument paralleled E. Cary Brown’s famous conclusion that in the Great Depression, fiscal policy failed to generate recovery “not because it does not work, but because it was not tried.” The key fact is that while Roosevelt’s fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem.

A good omen for fiscal policy.

Alas, her remarks were disappointing on the deeper question of the causes of the crisis:

Most obviously, like the Great Depression, today’s downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions.

Too bad she didn’t talk about the steep rise in inequality; stagnant real wages; households’ expanding use of credit to fill the gap between those stagnant wages and rising living costs; excess capacity and overproduction…

Read the whole talk here.

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