Romer covers unemployment

“Unemployment is high fundamentally because the economy is producing dramatically below its capacity,” Romer told an audience that filled Dodds Auditorium. “That is, far from being the ‘new normal,’ it is the old cyclical [pattern] ... 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.”

Romer noted that drastic consequences of unemployment, like the deterioration of skills and permanent declines in income, are inevitable in the wake of what has been dubbed the “Great Recession.”

Dean of the Wilson School Christina Paxson said in an interview following Romer’s speech that the colloquium, titled “The New Normal: American Policy Making after the Great Recession,” explored how the domestic recession impacts the United States’s ability to deal with foreign policy issues. “Bringing those together into a one-day colloquium seemed like it would wrap together a lot of very immediate policy concerns.”

Romer said she disagrees with critics who attribute the high level of unemployment to structural causes, such as the “decline in traditional manufacturing jobs and falling rates of employment among less-educated middle-aged men.”

“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,” Romer explained. “We do not need to appeal to any underlying structural changes to understand it, and there is every reason to expect that long-term unemployment will come back down when aggregate demand recovers.”

But Romer noted that the national economy was “on the road to recovery,” as evidenced by solid GDP growth and a slight decline in unemployment in the first quarter of the 2010 fiscal year, adding, “We are growing again, but not booming.”

“I have a very realistic sense of the tremendous challenges we face,” Romer said, while admitting that she has been called “Obama’s Sunny Economic Forecaster” in the headline of a recent profile in her hometown newspaper.

Paxson said that she shared some of Romer’s views regarding the future of the economy. “I do share her optimism that the unemployment numbers we are seeing now don’t have to be a long-term problem,” she said. “Sometimes you hear people saying, ‘We are in for a decade of low growth; this is going to be a repeat of what happened to Japan,’ but I don’t think it has to be that way.”

Romer said that the responsibility of boosting aggregate demand lies with the private sector in the face of long-run fiscal budget deficits that limit the federal government’s ability to stimulate the economy.

“Fortunately, the private sector is starting to show some life,” she said. “Last Wednesday’s retail sales numbers suggest that consumer spending, while not exuberant, is stronger than anticipated.” Romer added that “our focus as policymakers should be on how we can help the private sector recover faster.”

Romer enumerated several “fiscally responsible measures” to achieve this goal. She cited the Hiring Incentives to Restore Employment (HIRE) Act, a measure recently passed in Congress which “provides tax incentives for businesses to hire unemployed workers and retain them over time.”

“One targeted measure that is likely to be very effective is additional fiscal relief to the states,” Romer said. “By preventing tax increases and spending cuts, this relief raises income and employment relative to what it otherwise would be.”

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Romer also listed additional support for teachers, who might lose their jobs as states attempt to reduce budget deficits through spending cuts, as a prospective policy action.

Unemployment insurance benefits are another targeted action that can stimulate consumption and boost aggregate demand, Romer said. “The difficult financial positions of families suffering from extended periods of unemployment mean that most of any such support will be spent quickly and so have a rapid impact on the economy,” she said.

The head of the president’s economic team also suggested capital investment in small banks to promote small business lending, which fuels investment spending and creates jobs. “Because the government will be getting capital stakes that will lead to future repayments, these investments will involve little long-run costs to taxpayers,” she explained.

Other suggestions for economic recovery included continuing efforts to open foreign markets to U.S. exports and providing rebates for families remodeling their houses to achieve greater energy efficiency.

“I have a deep belief in the potential of the American economy and the promise of good economic policy,” Romer said at the end of her address. “My plea for today is for continued action — both to accelerate the return to normal for the millions of American families who are still suffering, and to make the normal that we return to better than it was before.”

Paxson said that Romer’s address reminded her of “how good a professor Christie Romer is. She is very good at breaking down complicated economic issues into very simple, compelling terms.”

Romer was appointed chair of the Council of Economic Advisers in January 2009, and is currently on a public service leave of absence from her post as the Class of 1957-Garff B. Wilson Professor of Economics at the University of California–Berkeley. Romer taught economics and public affairs as an assistant professor at the Wilson School from 1985 to 1988.

Known for her research on the causes of and recovery from the Great Depression, Romer co-authored the Obama administration’s plan for economic recovery with economist Jared Bernstein.

Romer served as the co-director of the Program in Monetary Economics at the National Bureau of Economic Research and was the vice president of the American Economic Association prior to her nomination.