Thursday, June 4, 2009

Old Thoughts

I wrote this a while ago, and Evs liked it, so I'm posting it. I wrote it after reading Christina Romer's speech for DWJ's class. One of my profs gave me discs from the JEP, JEL and AER that include articles and papers from 1997! I think I'll just give myself assignments like this after I graduate tomorrow so I won't stop thinking about things. I told Professor Swingle I can already feel myself getting dumber...
BTW, Professor Swingle's new baby [as if babies are ever old?] is SOOOO CUTE.

[written 4.15.09]

In the midst of the current macroeconomic malaise, people have been quick to liken the economy to that of the Great Depression. However, Dr. Christina Romer, the Chair of President Obama’s Council of Economic Advisers and an expert on the Great Depression, has been doing exactly the opposite. In a dichotomously optimistic and realistic manner, Dr. Romer recently pointed out that the data suggest that we are not even close to experiencing another Great Depression. For example, unemployment in the U.S. reached 8.5%, the highest level in more than a quarter of a century. While devastating, this figure is nowhere near the 25% unemployment rate of the 1930s. The current fall in real GDP, which stands at about 2%, pales in comparison to the 25% decrease in real GDP in 1933.

The purpose of Dr. Romer’s comparison is not to undermine the impact of the current economic downturn, but to give Americans hope. When the federal funds rate reached zero, the Fed was criticized for having played its best hand too soon. However, the federal funds rate is not the Fed’s only ammunition against economic downturn. Although expansionary fiscal policy is largely credited for having brought the U.S. out of the Great Depression, expansionary monetary policy played a much larger role than is generally acknowledged. When the U.S. returned to the gold standard at a higher price, there was such an influx of gold at the U.S. Treasury that the money supply increased by nearly 17% in a span of three years. This “quantitative easing” mitigated expectations of deflation and increased such interest rate sensitive variables as real fixed investment and consumer spending on durables. While Dr. Romer facetiously remarks that she is “not advocating going on a gold standard just so we can go off it again,” she underscores the significant role that monetary policy has still to play in expediting an economic recovery.

Hope, as trite as it may sound, is exactly what Americans need in order to avoid reverting to policies entrenched in protectionism and xenophobia. Americans look back on such measures as banning married women from the work force during the Great Depression with disdain and disbelief. One would expect a viscerally negative reaction of equal magnitude towards such acts as the Employ American Workers Act and the Mexican trucking provision of the Omnibus Appropriations Bill. Mexico retaliated swiftly to the elimination of a pilot program under NAFTA which allowed Mexican trucks to carry cargoes in the U.S. by imposing tariffs on 90 American agricultural and industrial imports. If the U.S. continues to engage in such trade wars, a decrease in imports can artificially raise the exchange rate and damage America’s own export sector. The result of such a scenario would be an overall decrease in the volume of trade. Americans should be careful to not forget the lesson learned from the Smoot-Hawley tariffs - “protectionism,” more often than not, protects very few at the expense of many.

I am graduating tomorrow.

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