Romer's Washington swan song

Christina Romer, the chairman of the president's Council of Economic Advisers, delivered what amounts to her farewell address yesterday, a final speech on the economy before her return to UC-Berkeley. Romer is perhaps best known for producing this:

In her remarks Romer essentially said she doesn't understand why the economy went into such a deep tailspin, characterized the stimulus plan as an exercise in pragmatism, concedes that the economic turnaround has been insufficient, and attempts to spin away the chart featured above. Let's go through some of the highlights, beginning with the confessions of her ignorance:

Precisely what has made it so terrifying and so difficult to cure is that we have been in largely uncharted territory...the President took office in the midst of a recession of historic proportions, but for which history provided little guidance.

...To this day, economists don’t fully understand why firms cut production as much as they did, and why they cut labor so much more than they normally would, given the decline in output.

...Even our statistical agencies appear to have been surprised. The advance estimate of GDP growth in the fourth quarter of 2008 was a decline of 3.8 percent (at an annual rate). The most recent estimate is nearly double that, a drop of 6.8 percent. Likewise, the first estimates of job losses in the last five months of 2008 turned out to be more than a million jobs smaller than the final estimates.

Question: if you can't properly diagnose the problem, how can you formulate a solution? Would anyone listen to a doctor that said, "I don't know what's wrong with you, but I recommend chemotherapy"? This should pretty much destroy any remaining conceptions that those in power are a bunch of super geniuses deftly operating the levers of power. By their own confession they're simply making it up as they go along.

Romer then goes on to describe the stimulus bill -- whose cost, by the way, has risen from an initial estimate of $787 billion to $814 billion -- as a pragmatic policy response. This apparently applies because, hey, at least they didn't take the money and build a high-speed nationwide rail network. In Washington it's all relative:

Just as the recession was unprecedented in postwar American history, so was the policy response. The American Recovery and Reinvestment Act was passed less than a month after the inauguration. The legislation was large, well diversified, temporary, and fast-acting.

Many would have liked to make it a more iconic bill -- a moon shot that concentrated spending on a single activity, such as building a nationwide smart electrical grid or a comprehensive high-speed rail network. But, as happened with many decisions, pragmatism won out.

We agreed that many of the things that would improve the economy fastest were unglamorous measures, such as state fiscal relief and tax cuts for working families. Because the final bill was a mixture of hundreds of measures, many of which don’t come with Recovery Act signs or easily identifiable links to the Act, it has been hard for people to see what the Act has done. But it is precisely because it works through existing programs and spreads funds widely that it could get out quickly and reap large benefits.

Besides the ridiculous characterization of the bill as pragmatic -- she uses the word "pragmatic" or "pragmatism" five times in the speech -- her description of the stimulus as "fast-acting" and "quick" is at odds with reality as billions remain unspent.

This shouldn't come as a surprise, given that anyone with an even rudimentary understanding of infrastructure spending realizes the various hurdles that must be cleared before projects can begin such as environmental impact statements, actual project design, a bidding process, etc (unlike, say, tax rate cuts). Apparently such knowledge is not to be found among our best and brightest charged with formulating economic policy.

Eyebrows should also be raised over her admission that the stimulus includes "hundreds of measures" for righting the economic ship. One can almost picture the various members of the CEA as akin to group of cooks (sorcerers?) adding a pinch of spending on clean energy, a few cups of spending on education, an ounce of tax breaks for energy efficient homes and -- presto! -- economic recovery.

It's more astonishing when one recalls that this allegedly very carefully crafted recipe was meant to cure an economic ailment that Romer and her staff didn't even understand! Then again, this probably sounds a lot better than simply saying "We didn't really know what to do so we just threw a 1,000 pages of stuff together in a few weeks times and hoped a few of the measures would work." I also don't think it is a coincidence how closely these measures aimed at revving economic growth overlap with longtime Democratis spending priorities.

This blather is then interrupted by a surprising moment of candor:

But compared with the problems we face, the turnaround has been insufficient. Though the unemployment rate has come down six-tenths of a percentage point, it is still 9½ percent -- an unacceptable level by any metric. Real GDP is growing, but not fast enough to create the hundreds of thousands of jobs each month needed to return employment to its pre-crisis level.

That's about the closest you'll get to someone in Washington conceding their policy prescription was a failure. It is followed, however, by much spin about how much the stimulus has contributed to a nascent economic recovery.

Romer then goes on to discuss the now infamous unemployment chart predicting the impact of the stimulus:

By February 2009, before the Recovery Act was passed, unemployment was already over 8 percent; and by June, before the Recovery Act could have had much of an impact, it was 9½ percent. That is, our projection turned out to be wrong even before the Recovery Act had a chance to get off the ground, which is about as clear-cut evidence as one could imagine that the problem was in our assessment of the baseline, and not in the effects of the Act.

Well, yes, Romer's team failed to properly assess the impact of the recession, which also begs the question of why anyone should think they are capable of formulating an appropriate response.

She then concludes her retrospective on the stimulus:

More generally, I will never regret trying to put analysis and quantitative estimates behind our policy recommendations. Macroeconomic policymaking is incredibly hard. If policymakers, scholars, and private analysts can’t discuss design issues, impact estimates, and baseline forecasts, I can’t imagine how we will ever manage to get policy remotely close to right. We need more numbers, more policy papers, more competing analyses, not fewer.

Yes, macroeconomics as practiced by Romer and the CEA under President Obama is very hard. The notion that a handful of economists can model something as mind-bogglingly complex as the US economy and how hundreds of various measures can impact it with a high degree of certitude is both arrogant and laughable. Rather than acknowledge this, she simply laments that she didn't have more charts, more spreadsheets, and more staffers (welcome to the knowledge problem!).

A more humble and realistic approach would have been to adopt broad structural reform measures aimed at improving the overall economy, rather than a multitude of spending measures and tax breaks which are rooted in central planning and designed to impact this sector or that. Examples would have been tax simplification and rate reductions, the passing of free trade agreements and regulatory relief.

Such measures, however, are difficult to pass, as they are focused on the empowerment of individuals rather than politicians and the government. Simply doling out hundreds of billions of dollars in taxpayer money is neither courageous nor effective. It's been an expensive lesson.

Related: Dana Milbank's take on the speech here.

Update: Thoughts from Tim Cavanaugh, Veronique de Rugy and Ann Althouse.