7/24/10 2:37 AM
Christina Romer's Faulty Depression History - Robert P. Murphy - Mises Daily
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"Romer's historical account only makes sense if one has
an a priori commitment to the remedial role of deficit
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Christina Romer's Faulty Depression History
Mises Daily: Monday, July 06, 2009 by Robert P. Murphy (http://mises.org/articles.aspx?AuthorId=380)
Christina Romer, chair of the Council of Economic Advisers to
President Obama, recently wrote an ode
story_id=13856176) to Keynesian deficit spending as a method for
curing severe recessions. Yet a simple glance at the big picture
shows that the Keynesian story makes no sense.
Romer on the "Mistakes of 1937"
Romer worries that President Obama will cave in to political
pressures, and cut stimulus efforts before the economy has
sufficiently healed. She alleges that this was the same mistake
Roosevelt made after his initial (apparent) success in battling the
[T]he recovery in the four years after Franklin Roosevelt
took office in 1933 was incredibly rapid. Annual real
GDP growth averaged over 9%. Unemployment fell from
25% to 14%. The second world war aside, the United
States has never experienced such sustained, rapid growth.
However, that growth was halted by a second severe downturn in 1937–38, when unemployment surged
again to 19% … The fundamental cause of this second recession was an unfortunate, and largely
inadvertent, switch to contractionary fiscal and monetary policy. [Spending cuts and tax hikes] reduced
the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure.
In the present article, I don't want to focus on Romer's claims about monetary policy. Instead I want to focus on her
argument concerning deficit spending and the 1937–38 "depression within the Depression," because many prominent