Analysis: Christina Romer, Stimulus Lost (2010) - Essay Example

As a result, the economy has not had all the additional support that it needed. While we would all love to find the inexpensive magic bullet to our economic troubles, the truth is, it almost surely doesn’t exist. The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts.” - CHRISTINA ROMER, ‘Stimulus Lost,’ The Economist, September 1, 2010 When Christina Romer resigned from her position in the Obama Administration in 2010, she cited two main issues of contention which were not resolved by government policy, despite the lagging recovery following the bailout packages and stimulus response authorized in the aftermath of the 2008 economic meltdown.

Romer stated that she saw a need for the government to “to spend more and tax less,” surely a dream prescription for any policy maker, but one that raises serious questions about the sustainability of the course she was proposing. It should be noted that in 2010 the U.S. was also approaching a 100% Federal Debt to GDP ratio which is regarded by economists as a serious symptom of financial problems in national government. Furthermore, the U.S. government was facing a Congressional imposed national debt limit, which could have lead to a complete shutdown in government services, as well as a budgetary deficit, where tax incomes were falling short of projections and needed funds for financing government programs that were committed to already by Congress.

Romer stated that “the inexpensive magic bullet to our economic troubles, the truth is, it almost surely doesn’t exist” – implying that more expensive programs and spending were required. Instead, she proposed a combination of Keynesianism and Reaganomics, increased governmental deficit spending as an economic stimulus along with simultaneous national tax cuts, as the solution. Yet, this is an unrealistic solution to the economic problems in the United States when the greater issue is the levels of public, private, corporate, and municipal debt combined.

Just as S&P downgraded the U.S. from its “AAA” (Triple A) credit rating in 2010 because of overspending combined with tax cuts, so too was Romer’s policy solution likely to lead to a more serious and substantial downgrade of the nation’s finances by ratings agencies, economists, and analysts around the world. The only real way to finance Romer’s proposal is for the U.S. government, or its quasi-independent and unaudited central bank the Federal Reserve, to print money. In fact, this is exactly what was occurring with the Federal Reserve directly buying U.S. Treasury debt as part of its Quantitative Easing program.

If the Federal Reserve “prints” new money, even via electronic notation devices rather than a currency press, the risk is that the U.S. dollar will be devalued and also that inflation will occur. These factors are two sides of the same coin, for when the dollar is devalued it fundamentally buys less internationally, be it in commodities such as oil or precious metals such as gold. Yet, this effect can also spread to food, industrial materials, consumer goods, and other fundamentals of the economy, not only in the U.S. but around the world in developing nations, the E.U., and other countries struggling to recover from the effects of the U.S. economic meltdown. Romer’