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Lessons from 1929: Christina Romer

"Roosevelt's debt-financed spending packages were historically unique since balanced state budgets were the norm.. Roosevelt's New Deal led to an increase of nine to thirteen percent in the real GDP between 1934 and 1938." Charlie Rose's interview with Ms Romer is life-giving.
LESSONS FROM 1929

The "Great Depression"

By Olaf Storbeck

[This article published in: Handelsblatt 4/1/2009 is translated from the German on the World Wide Web,  http://www.handelsblatt.com.]


The economics adviser of US President Barack Obama, Christina Romer, is one of the leading experts on the "Great Depression." The Berkeley professor tackles the question what today's economic policy can learn from the disaster of the 1930s. Romer reaches amazing conclusions.

Consensus prevails among economists: the world economy is experiencing the deepest crisis since the Great Depression. What lessons can be learned from history, for today's economic policy?

For Christina Romer, economic adviser of American president Barack Obama and expert for the first worldwide economic crisis that erupted in 1929, one lesson stands out: economic assistance in homeopathic doses throttled too early is a square peg in a round hole, Romer recently emphasized in a speech titled "Lessons from the Great Depression for Economic Recovery in 2009." The government must think big and over a longer time period,

Already in the 1990s, Romer concluded in her studies: the state economic packages were not the main reason for the end of the Great Depression. However this does not mean active fiscal policy is ineffective per se. Rather politics should have no scruples with economic packages in a deep economic crisis. "Roosevelt's debt-financed spending packages were historically unique since balanced state budgets were the norm. Still the programs were rather small."

In 1934 the budget deficit only amounted to 1.5 percent of the gross domestic product (GDP). In 2009, on the other hand, the economic program of the Obama administration tears a deficit of around twelve percent of the GDP in the state budget. This package will not simply fizzle out, the Obama adviser is sure. The state emergency help for the economy should not be phased out too soon.

Roosevelt's "New Deal" led to an increase of nine to thirteen percent in the real GDP between 1934 and 1938. However the government drove back state spending in 1937. Growth promptly slowed down. "This episode is an important warning for today's economic policy," Romer said. "We must be sure the private sector is firmly in the saddle again before the government withdraws its assistance.

The Good News from the 1930s is that expansive monetary policy works even when the key interest rates are at zero. The Federal Reserve has no direct influence on the real interests any more but can still influence the inflation expectations of people. US-president Roosevelt did this in 1933 by temporarily abandoning the gold backing of the dollar and drastically depreciating the US currency. The US economy was flooded with liquidity - a process resembling the strategy of "quantitative easing" pursued today by the Federal Reserve Bank, Romer said. At that time monetary policy succeeded in breaking deflation expectations - although the price level earlier fell almost 25 percent.

The most important lesson according to Romer is: the Great Depression ended - although the fall of the economy was far deeper than today. Many people lost all trust in the market economy and the economy policy made many mistakes in the struggle against the crisis. That the economy despite everything could overcome the Depression should give Americans hope - Romer stressed - the starting situation today is far better than 60 years ago.

RELATED LINK

VIDEO: Christina Romer on The Charlie Rose Show, April 14, 2009:

 http://www.charlierose.com/view/interview/10226

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