Romer: Recovery Could Take 40 Years

Econontersect:   Christine Romer (pictured), former Chair of the Council of Economic Advisers for President Obama, has said that if the wrong policies are followed employment may take 40 years to return to normal levels.  She said that such an outcome could occur if the Federal Reserve continued “tinkering around the edges” of the economy.  Romer said the Fed needs to “aggressively reset expectations” with a “new operating strategy” that could “really break through and affect people’s behavior.Romer said action is necessary because of slow domestic growth due to overleveraged consumers and because exports, which have been growing, are likely to recede because of economic problems in Europe, a leading trading partner.  She said that more stimulus spending by the government in addition to the Fed setting a nominal GDP target as a primary aspect of policy.

From Securities Technology Monitor:

The setting of a growth target by the Fed would be similar to the Volcker Moment, she said, when former Fed chairman Paul Volcker set monetary policy targets roughly 30 years ago to break the back of the nation’s double-digit inflation rates.

The setting of a nominal target would not be a “sneaky way to increase inflation expectations,’’ as she says prize-winning economist Paul Krugman contends, but instead lead to specific actions. One example: Another round of “quantitative easing” by the Fed, where it buys up higher-rate long-term Treasury bonds to make it easier for companies to plan on low rates on long-term loans they seek.

She also said the nation needs to reform bankruptcy laws and seek other measures that would clear out the stagnant stock of homes that have either been vacated or for which loan modifications still need pursuit. She sadi there remains “$750 billion of negativ equity” in homes, nationwide.

Finally, she said “fiscal stimulus absolutely does work” and that the Obama Adminsitration should pursue another round of stimulus that includes infrastructure spending that has long-lasting benefits for the economy.

Also high on her list: tax cuts for employers that raise payrolls. Current policies embedded in the Obama Administration’s American Jobs Act should be extended to large employers. There should not be distinctions made between what size of company qualifies for the cuts.

Congress should not postpone, however, plans for deficit cuts. Instead, that has to be part of the new “operating strategy.’’

Both parties have to rally around a “grand bargain” like the plan proposed by a deficit reduction commission led by former White House chief of staff Erskine Bowles and former Republican Senator Alan Simpson of Wyoming. The Bolles-Simpson plan that called for $4 trillion in revenue hikes and spending cuts over the next two decades. That’s twice the rate targeted in recent Congressional debates, Romer said.

Source:   Securities Technology Monitor