Romer On The Unemployment Crisis: "It's Aggregate Demand, Stupid"

By Big Tent Democrat, Section Economy
Posted on Sun Apr 18, 2010 at 12:43:48 PM EST
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Christina Romer, chair of the president’s Council of Economic Advisers, says:

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

Does Deficit Hawk Tim Geithner know? Romer continued:

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.”

Does anyone else in the Obama Administration agree? See also Brad DeLong and Matt Yglesias.

Speaking for me only

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Romer On The Unemployment Crisis: "It's Aggregate Demand, Stupid" | 13 comments (13 topical)

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The collapse in demand was caused by the (5.00 / 4) (#2)
by esmense on Sun Apr 18, 2010 at 01:03:18 PM EST

crisis -- but what caused the crisis? If you think that it is just a matter of the financial markets losing control of instruments they didn't really understand, with a little bit, perhaps, of fraud thrown in for good luck, as our political and financial communities appear to think, a little stimulus money vs. a little deficit reduction is an amusing little debate to have.

But what if the crisis didn't cause the collapse of demand but the collapse of demand, arising from real structural changes in the economy that have persisted over time, caused the crisis?

The fact is this; the bubble in the housing market and the various sub-prime scams and questionable financial manipulations and increasing debt reliance of consumers at all levels of the economy, that created it, was masking or deferring the consequences of a tapped out consumer market.

Without easy and questionable debt, or a serious committment to wage and domestic job growth, consumer demand will continue to be extremely weak.

: Great post (none / 0) (#3)
by Militarytracy on Sun Apr 18, 2010 at 01:10:20 PM EST

But while the Obama administration understands where the deluge of heavenly manna came from, they still can't grasp that this craze only cycles every few generations after everyone convinces themselves throws the rules out the window. After we all sober up from our drunken binge, it is over man and now we are back to basics in ways the Wall Street Titans can't deal with and have never dealt with in their lifetimes. This isn't how they ever thought it would turn out for them.

: A Hall of Fame (none / 0) (#9)
by cal1942 on Sun Apr 18, 2010 at 09:54:45 PM EST

comment esmense.
I question what recovery can occur without serious structural realignmment.
We've been headed in this direction for probably 3 decades making foolish policy choices on top of foolish policy choices throughout the period.

: wage-productivity gap (none / 0) (#13)
by beowulf on Mon Apr 19, 2010 at 08:37:37 AM EST

Great comment, this is a point that economist Ravi Batra has been making for years.
The wage-productivity gap is the gap between the real wage and labor productivity. The real wage is the purchasing power of the average salary. If productivity rises fast and the real wage rises slowly, then a wage-productivity gap develops and grows... Each time the wage-productivity gap goes up, the economy will contract because of overproduction. What they did was come up with a scheme to create debt in the economy because, by creating debt, they could raise demand to the level of supply.
http://www.truthout.org/031609A

Henry Ford had it right (5.00 / 1) (#11)
by NYShooter on Mon Apr 19, 2010 at 12:41:06 AM EST

On this point, anyway. Against the advise of his management team he priced his cars way below what the market was willing to pay. And, against the advice of his accountants, he paid his workers way above the going rate (at that time) so all could afford his cars.

He was willing to forgo short term profits for the long term goals of his company, and as a template for the long term health of the U.S. economy. He felt that the way to ensure that the economy would grow and become self-sustaining was to have "full" employment at attractive wages, and that, in turn, would fuel demand and result in maximum production. He was proven right and his example was the model for American industry for many decades to come. And that philosophy led the way for the growth in the standard of living enjoyed by most Americans.

And then, Ronald Reagan was elected.......

: Great Model..... Not (none / 0) (#12)
by squeaky on Mon Apr 19, 2010 at 01:16:07 AM EST

The American Jewish Historical Society described the ideas presented in the magazine as "anti-immigrant, anti-labor, anti-liquor, and anti-Semitic."....
...Michael Barkun observed, "That Cameron would have continued to publish such controversial material without Ford's explicit instructions seemed unthinkable to those who knew both men. Mrs. Stanley Ruddiman, a Ford family intimate, remarked that 'I don't think Mr. Cameron ever wrote anything for publication without Mr. Ford's approval....
....One Jewish personality who was said to have been friendly with Ford is Detroit Judge Harry Keidan. When asked about this connection, Ford replied that Keidan was only half-Jewish.

Wiki
He hated FDR and was against Unions... what a progressive...

The Ayn Rand embracers (none / 0) (#1)
by Militarytracy on Sun Apr 18, 2010 at 01:00:38 PM EST

Who now can't abide how a primal market corrects itself because it would take them with it and now call her WRONG have all appeared to be on the same page about certain "deficits". The head of the Fed and Geithner keep peppering certain things they say with deficit hawk B.S. that when probing deeper only adds up to cutting "entitlements" as deeply as possible. Larry Summers has no parsing couth or tact at all and knows it, so he only pounds the tables that exist closed off to the public eye declaring that if the little people are screwed that's just too damn bad.

I don't exactly understand "cyclic".. (none / 0) (#4)
by EL seattle on Sun Apr 18, 2010 at 02:32:22 PM EST

...in this sense.

If workers have to change industries because their former careers have been eliminated by new technology or off-sourcing, is that a "cyclical" change?

If workers have to work at jobs (in their field) that pay less than 80% of their previous rate, is that a "cyclical" change?

It seems to me that to assign all the blame for the current situation on one single "crisis" is probably folly. Our whole big-picture system may be evolving, and I don't think that evolution is usually a cyclical process. But what do I know?

Lessons of the past suggest (5.00 / 1) (#5)
by Cream City on Sun Apr 18, 2010 at 02:39:37 PM EST

to me that it is not cyclic -- but it is repetitious, if in reverse.

The long drawn-out end of the Industrial Revolution has a lot of resemblances to the beginning of it in the 1830s (in the U.S.; earlier in England). And it was cataclysmic, because it was not understood well at the time -- or perhaps it was and those who could have done more to ameliorate it did not care.

Millions of lives were forever altered, and not for the better. I fear we are seeing that again.


: We are seeing it again (none / 0) (#6)
by Militarytracy on Sun Apr 18, 2010 at 05:07:43 PM EST

Things will be terrible too for ten years. Wall Street has no income stream at this time and after you hurt people this badly it doesn't return for a generation after they prove to those who would invest and save that they are worthy of the money that would be invested in them. But we are only halfway through THE FALL. There is a second collapse coming and the only way around it is to attempt to deleverage using the literal blood of human beings, and I personally believe we are too far in over our heads for that to even work....that is the only way to save the current structure but they will do everything to save it until it can't be done. When they realize and embrace that it can't be done though, it is going to be really ugly or the deleveraging done using the very blood of the people will be equally as ugly in the longrun.

I agree (5.00 / 1) (#10)
by cal1942 on Sun Apr 18, 2010 at 09:57:48 PM EST

This is not cyclic. This is the straight line consequence of awful policy.


Ummmm Oh Yeah (none / 0) (#7)
by Militarytracy on Sun Apr 18, 2010 at 05:44:19 PM EST

Lest I forget, if anyone wants to know why many liberal bloggers are having a difficult time dissing Timmeh at this time or perhaps wondering outloud where the money driving the Wall Street boom is really coming from....there is always the issue of precious special elite access. If you were too hard on Timmeh you may not be invited back. Of course Atrios doesn't shut up and quit hinting, but you have to know a bit about the topic to understand Duncan Black so is he not enormously dangerous but just dangerous enough to want to keep him close....maybe have his home number :)?

demand was juiced in 2000's (none / 0) (#8)
by diogenes on Sun Apr 18, 2010 at 08:52:19 PM EST

No--aggregate demand is back to normal. For years the housing bubble created inflation in home equity and artificial "wealth" used for home equity loans to increase demand and demand for unneeded houses (boosting construction industry). No amount of Obama stimulus will restore this.