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Does fiscal policy work? Yes, says former Obama advisor

FEBRUARY 29, 2012
by Sara Morano ’14, Contributing Writer

“The Recovery Act was not large enough!”

The former chair of President Obama’s Council of Economic Advisors, Christina Romer, spoke to a crowd of about 60 people, mostly economics and business students, in the Watkins Room late Tuesday afternoon, as part of an address titled, “Does Fiscal Policy Work?”

Romer joined a pantheon of other outstanding economists like Nobel-prize winners Paul Krugman, Wassily Leontief, and Amartya K. Sen in being chosen as the 32nd speaker of the Marsh and McLennan American Enterprise series.

Each year, the sponsored event brings a distinguished economist to campus for the purpose of speaking on a contemporary issue. Romer presented the findings of the year-long study she completed with her husband, fellow economist David Romer for Tuesday afternoon’s lecture.

Their study compared the effects of two kinds of tax cuts to draw conclusions about the effectiveness of fiscal policies. They compared cuts made specifically to combat economic recession with “exogenous” tax cuts, made outside of a specific plan for economic recovery. The hypothesis was that their results would show recession-specific policy prescriptions to have positive effects on the economy, measured by variables like employment and GDP growth.

A graph titled “The Effects of Tax Changes on Cyclically Adjusted Revenues” quantified the results of the Romer and Romer study.

The former Obama administration chair shared with the audience the personal moment that occurred when an entire year and about 5,000 pages’ worth of data culminated in this graph, adding one of many comical moments that punctuated a lecture dense with economic evidence.

“Our children roll their eyes when they think about that Saturday morning”, she chuckled, “ two middle-aged parents jumping up and down in front of the computer shouting, ‘It worked! It worked!’”

Most simply, the parent team’s findings supported the idea that “fiscal policy matters” through their examination of specific tax cuts. Romer incorporated the research findings of her peers on the effectiveness of various other fiscal policy tools like tax rebates and stimulus to local and state government to substantiate the conclusion of her own study.

By the lecture’s end, Romer had given copious evidence to support her insistence that a more “monumental” stimulus than 2009’s Recovery and Reinvestment Act, which her economic advisors had a major role in writing and shaping, was still needed.

The weight of Romer’s evidence, however, was left as something to ultimately be determined by the jury of her student audience, whose important role in the question of fiscal policy became clear as the lecture drifted towards economic predictions for 2035 that admittedly, “scare the life out of even some experts!”

Last updated February 29, 2012
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