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CEA chair Romer ('81) outlines tools for treating ailing economy

  • Christina Romer ('81)
    Christina Romer ('81)  The current chair of the Council of Economic Advisers returned to her alma mater to discuss the financial crisis.  
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Christina Romer (’81) often is asked whether she likes her new job as chair of President Barack Obama’s Council of Economic Advisers.

In retrospect, she may, she said, just as she came to love her alma mater.

Romer, a 1981 graduate of the College of William and Mary, returned to campus in April to deliver a lecture at the invitation of the Thomas Jefferson Program in Public Policy. A macro-economist extending back to her days studying with Bob Archibald and others at her alma mater, she was an energetic advocate of the president’s “big-picture approach. ” “There is no question the economy is very sick, indeed,” she said, “but the prognosis for recovery is favorable.”

Romer alluded to the multitude of medical analogies referencing the economy. “You’ve probably heard that we’re giving the banks a stress test to see how strong their capital hearts are,” she said. “I often talk about how the stimulus package is like medicine; you’ve got to give it time to work.” She then turned toward “diagnosis and treatment.”

As far as the diagnosis, Romer said she would take as given the drop in housing prices, about 25 percent since the peak in 2007, and in stock prices, falling roughly in half since October 2007. These have impacted consumers, who have, according to one estimate, $13 trillion less wealth. That led to a decline in aggregate demand for goods and services, she said.

The “defining thing,” however, about the current recession is the “drying up of credit,” she said.

As the symptoms are complicated, the solution can neither be simple or quick, Romer said. She outlined what she perceives as the four central tenets in the recovery plan. These include (1) direct-fiscal stimulus amounting to the equivalent of 2.5 percent of the nation’s gross domestic product, (2) financial stabilization and rescue, which includes the toxic-asset purchase program, (3) the homeowner affordability and stability plan, a program that, because it lowers mortgage payments, has been compared to a $30 billion tax cut, and (4) the continuing investment initiatives targeting areas such as education and energy.

Given the broad nature of the treatment, Romer looked toward positive results by the end of the year, a time when reassessment may be needed. “I am sure the economy will come through this crisis and will emerge stronger and more resilient than ever,” she said.