Tuesday, March 10, 2009

Myth Builder Romer

In a post below, I take Council of Economic Advisers head, Christina D. Romer, to task for discussing the Great Depression in the middle of the game, without mentioning the role of shrinking money supply in 1929.

Bob Murphy takes a harsh look at the misleading way Romer presents the government deficit spending data for the Herbert Hoover years. The hazy implication in Romer's speech is that Hoover either ran a balanced budget or a surplus, but certainly not a major deficit. It was a major deficit.

While I am on the subject, here's a few other interesting facts that did not find there way into Romer's speech, while she cheered on Obama's major deficit spending program:

1. Romer has a paper out that concludes that the multiplier for tax cuts is three!:

...tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.
Was this not discussed in her speech as a method for battling the downturn, because Obama has raised taxes?

2. Curiously, most modern day spending multipliers are coming in around 1.5. (Note: In reality, there is no such thing as a multiplier for spending. I am working through the exercise to show the inconsistencies in Romer's speech based on what she believes, i.e., that there is a spending multiplier, in addition to a tax multiplier. In the sense that the Laffer Curve can be considered a multiplier, there is in many circumstances a tax cut multiplier.) Romer in a co-authored piece with Jared Bernstein for the Obama transition team used a spending multiplier of 1.57 for Obama's fiscal spending. She drops the tax multiplier without explanation in the paper to .99. Again, could this have anything to do with the Obama tax increases?

Here's Harvard economist Greg Mankiw on numbers used in Romer-Bernstein:

These are reasonable figures in light of mainstream models. But, as I pointed out in an earlier post, these models might well have things backward. Apparently, Team Obama is not convinced by the recent research of Christina and David Romer, who conclude:

...tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent.

That is, Team Obama assumes that tax changes are less than half as potent in influencing the economy as the new CEA Chair estimated them to be in her own
In short, there appears to be a lot of cherry picking of facts, and distorted representation of facts, in the Romer speech, which suggests the CEA will provide cover for Obama government expansionary activities. They will be part of the myth builders for this administration--read their papers and reports very carefully before you reach any conclusions.


  1. The more I think about her handling of the Hoover record, the more I think she knew perfectly well what she was doing.

    She didn't literally say, "Herbert Hoover had a balanced budget."

    Instead, she said, "Balanced budgets had certainly been the norm before FDR."

    That was true, in the sense that it was the norm up until Herbert Hoover, and most of US history pre-FDR did not focus on the Hoover presidency.

    So her statement is technically true, just extremely misleading.

    And since she specifically said how much the deficit as a % of GDP jumped from 1933 to 1934, she surely is aware of all the data for that period. So it's not like some ignorant op ed columnist calling Hoover a small government man. Romer had to know exactly what she was doing, and chose her words in such a way as to defend Obama's tax and spend plans while not technically lying about the Hoover years.

    I should say though that I think a lot of these academics probably didn't realize what they were getting into. I mean, it must be very exciting to have a hip new president ask you to work for him, and only later do you have people telling you, "Hey, you can't say such and such, because it gives ammunition to the President's critics. Come up with a different way to phrase it."

  2. Right on, Bob.

    She cherry picked the data that makes Obama's case and massages the other stuff. If you read her contribution on business cycles in the Concise Encyclopedia on Economics http://tinyurl.com/bvz7d2, you can see she knows her stuff.

    That said, your point about the pressure they must come under is well taken.

    Her speech is just another reminder that we have to watch really carefully what comes out of CEA and the rest.