Aggregate Demand Cycle Reason For Us Unemployment Problems
According to Christina Romer, the Council of Economic Advisers chairwoman
, the primary reason why there is such a high level of unemployment is a extreme shortfall in aggregate demand in her keynote speech of the 2010 Princeton Colloquium on Public and International Affairs.
Romer says, "Unemployment is high fundamentally because the economy is producing dramatically below its capacity. That is, far from being the 'new normal,' it is the old cyclical [pattern] ... Indeed, at one point I had tentatively titled my talk 'It's Aggregate Demand, Stupid,' but my chief of staff suggested that I find something a tad more dignified."
Romer further views that the results of unemployment, like the degradation of skills and declines in income, are expected following a recession.
She disagrees with pundits who blame the high level of unemployment to the "decline in traditional manufacturing jobs and falling rates of employment among less-educated middle-aged men."
According to Romer, "the overwhelming weight of the evidence is that the current very high and very disturbing levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. We do not need to appeal to any underlying structural changes to understand it, and there is every reason to expect that long-term unemployment will come back down when aggregate demand recovers."
Optimistically, Romer stated that the national economy is already "on the road to recovery," as evidenced by a recent solid positive GDP growth and a slight correction in jobless numbers in Q1 of the 2010 fiscal year.
Romer further states that the responsibility of boosting aggregate demand rests with the US private sector due to budget shortages that severely limit the US government's ability to properly stimulate the economy.
"Fortunately, the private sector is starting to show some life," she said. "Last Wednesday's retail sales numbers suggest that consumer spending, while not exuberant, is stronger than anticipated." Romer notes that "our focus as policymakers should be on how we can help the private sector recover faster."
"One targeted measure that is likely to be very effective is additional fiscal relief to the states," Romer said. "By preventing tax increases and spending cuts, this relief raises income and employment relative to what it otherwise would be."
Romer also supports giving additional aid to teachers, who might be laid off as states try to reduce budget deficits through cost cutting, as a prospective policy action.
Other ideas for boosting economic recovery included aggressively opening foreign markets to U.S. exports and providing rebates for families who are remodeling their houses to achieve greater energy efficiency.
"I have a deep belief in the potential of the American economy and the promise of good economic policy," Romer said at the end of her address. "My plea for today is for continued action both to accelerate the return to normal for the millions of American families who are still suffering, and to make the normal that we return to better than it was before."
Romer was chair of the Council of Economic Advisers in January 2009. She lectured economics and public affairs as an assistant professor at the Wilson School from 1985 to 1988.
Well-known for her research on the nature of and recovery from the Great Depression, Romer co-wrote the President Obama's plan for economic recovery with economist Jared Bernstein.
She served as the co-director of the Program in Monetary Economics at the National Bureau of Economic Research and was the vice president of the American Economic Association prior to her nomination.
by: Huey Harden
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