Christina Romer Interview On Lessons From The Great Depression and The Great Recession

This interview with Christina Romer is about the lessons learned from the Great Depression. She ranks the 5 best things that she has read about the Great Depression and the lessons from each. Its longer than the typical reference in a blog but it is extremely informative. She was a top economic advisor to the Obama administration and she argues that fiscal policy and monetary policy kept us from experiencing a downturn that would have been worse than the Great Depression without those policies. She also discusses some of the things that might have been done better and why they were not done.

She ranks the book by Milton Friedman and Anna Schwartz as number one on her list. She liked it best because it used historical evidence to support their conclusion that the banking crisis and the decline in the US money supply was largely responsible for the Great Depression in the US. She contrasts the use of historical data with our current focus on running regression equations to estimate the effects of policy on outcomes and explains why the good use of historical data was superior.

The second book on here list was also by an economic historian who explained the role of the gold standard in turning the US Depression into a global Depression. Foreign governments were concerned about the flow of gold from their countries to the US. They responded by raising interest rates to reverse the flow of gold. That caused their economies to lapse into Depression. The countries that went off of the gold standard were the first to recover from the Depression. She argues that the current problems in the eurozone are like those under the gold standard.

The third book is another book on the history of the Great Depression. It shows that our Great Recession was potentially deeper than the Great Depression and that we should have used even more aggressive policies to counter it than we did. The book also shows that our ignorance of how economies work in the 1930's was part of our problem. We kept experimenting with stop and go measures to turn things around and many were counterproductive. For example, Hoover raised taxes when increases in government spending led to a budget deficit. Roosevelt did similar things with fiscal policy. Monetary policy was also counterproductive.

She also cites numerous papers by Ben Bernanke who was a scholar of the Great Depression. His research showed that monetary policy could go beyond cutting short term interest rates and do much more to head off price deflation.

Her experiences in the Obama administration were also instructive. She argues that federal fiscal policy offset the decline in government spending at the state and local level, but it would have necessary to make it even larger in order for it to have had a more positive impact. It helped to keep the recession from getting worse but it was small relative to the size of the economy. She also argues that the Fed helped to keep us out of depression by rescuing the banking system from collapse. Bernanke understood the role of credit contraction in the Great Depression and he did what was needed to maintain credit. Monetary policy is also effective when we at the zero bound as we are today. A more aggressive response is needed. She believes that the Fed should have a nominal GDP target as well as an inflation target and act accordingly. The Fed, and most central banks, have a bias towards inflation control. She thinks that its policies can set inflation expectations that would stimulate consumer and business spending. Deflation expectations have the opposite affect. She concludes by explaining some of the political problems that arise in setting appropriate policies. The use of expansionary austerity as a response to budget deficits is contractionary but it is political popular.