Notes From Underground: Bye bye Christina Romer

In light of Romer’s recent announcement that she’ll be stepping down as the chair of Obama’s Council of Economic Advisers, we at NOTES just wanted to reiterate our thoughts about Romer and her position on taxes and its effects on GDP growth. Here is the post from July 16:

The winds of a global slowdown are blowing strong. Japanese numbers have been weak and the BOJ warned on Thursday that it expects Japanese growth to slow next year as some of the stimulus evaporates. The numbers out of Europe have been better than expected but only in the stronger economies; the peripheries remain weak. The PIIGS’s credit stress has eased somewhat as the Chinese purchase of Spanish debt helped provide some optimism. We point this out because it was the Chinese who decided against buying Greek debt in early December that began the real European debt crisis.

Today’s consumer confidence numbers in the U.S. have caused concern that the U.S. economy remains very fragile, even though we do not give much credence to that University of Michigan survey.

In an interview with Judith Woodruff that’s airing on Bloomberg television today, Sir Alan Greenspan advised that the Bush tax cuts should be allowed to expire. We have not heard the entire interview–only read excerpts–so we are only responding to his key points. Greenspan, who has been wrong for so long is most likely wrong again. We know that he will say that he has always maintained that tax cuts should always be met with spending cuts–his view of PAY-GO. The concept of PAY-GO is based on the concept that every tax cut has to be paid for with spending cuts by Congress. This worked well under President Clinton when the Congress was controlled by the Republicans, so the split-party government created responsibility on the part of both parties. With Geithner and others pushing for the Europeans to forgo austerity until the global recovery is more secure, we find it ill-conceived for Greenspan to be spouting austerity in the U.S.

Christina Romer, the chair of the Council of Economic Advisors (CEA) and the president’s economic tsar, made her academic reputation with her work on the impact of taxes on GDP growth. One result of her work was that a 1 percent increase in taxes relative to GDP results in a loss of 3 percent of growth. This raises serious questions about the coming impact of the tax increases coming in 2011 due to the expiration of the Bush tax cuts. We won’t know the full impact because most of the increases are supposed to be directed against the wealthiest tax payers and we are unsure of Romer’s work in regards to taxes on the rich. If any of our readers can add to our knowledge in this it will be greatly appreciated but we are alert to the FOMC’s most recent fears and Geithner’s cajoling of the Europeans on their austerity measures. If the tax rises that begin in 2011 are greater than 1 percent of the economy, we would expect Romer to raise her voice in opposition to the tax increase.

The inflation/deflation argument is in full force, and, as the FED warned, deflation is not an option. Many are looking at the recent slide in GOLD prices and the selloff in commodity currencies as proof  of deflation. There may be some truth to that, but from our standpoint the GOLD break has more to do with the EURO rally. Many investors ran into the GOLD/EURO cross as they feared the demise of the EURO. Now that there has been some stabilization in the eurozone, the safe haven crosses are unwinding. Major support levels are being tested in many of the previous haven plays,and, as we often suggest, get your technicals in order and look for levels to acquire the trades that will perform well when the FED and administration throw caution to the wind and do everything possible to prevent deflation and economic contraction from taking hold. Sir Alan, please gracefully exit the stage.

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11 Responses to “Notes From Underground: Bye bye Christina Romer”

  1. John Treichler Says:

    I’m thinking that the only approach to encouraging small business manufacturing to expand and hire workers is to show small business that there will be markets here in the USA.
    My thought is that we need to move to tariffs on imports the value of which is based on the undervalue based on foreign currency pegging. For example if we determine that China is under-pegging 50% compared to “fair value” then we impose a 50% tariff on All Chinese imports.

    The international companies that invested heavily in China then import “cheap” goods to the USA will protest and lobby. But, it was their decision to move their capital to China in order to sell into the Chinese market. Chinese policy was “Build it here to sell it here”.

    WE should have the same policy [Pro-USA]: Build it here to sell it here. It’s OK to take the profits outside the USA but the jobs stay here. Back the policy with tariffs.

    USA companies will expand operations if they are confident they will have USA markets in which they can compete with import prices.

    Our National leadership gave away our manufacturing advantage to gain influence in foreign countries as an instrument of national power. Of all the Presidential Candidates in 1988, only Ross Perot was telling the Truth about free trade and deficits. The other Candidates were lying through their smiles, and we elected one of these as President…. .

    • Joe Says:

      Throughout history tariffs have been a disaster. It would raise the costs of goods to Americans and result in additional public sector interference likely involving Fed attempts to control the price level. It would be the early ’30’s all over again.

      And I agree with Yra, that controls on capital would likely follow further hurting growth. I think we also have to consider non-traditional US sectors that include intangible products and intellectual property. I’m not sure they are properly accounted for in the trade balance figures. Also to consider regarding exportation of old line manufacturing: it has resulted in a cleaner environment. At what cost do we keep it clean? We’ve exported a lot of pollution over the past few decades.

      A good tax policy would be one that is competitive and consistent, both for individuals and corporations. But I also believe that the right tax policy in and of itself will not cure our economic problems unless total government spending is brought under control and then reduced. Supply side works, to a point. My problem with it is that as it grows revenue, so grows the public leviathan. The same for subsidies and injection of third party payers into the equation.

      Sound money and sound agency will go a long way towards keeping our own capital here and attract foreign sources of capital to our markets.

  2. yra Says:

    I think perot was 1992 –but beside that it is a very slippery slope to go the tariff route and once you unleash those demonic forces of protection you are flirting with an economic tsunami as others will follow and then you will get capital controls–not a road I would like to take—tax policy is the right path and it would cause a lot of capital to head back to our shores for investment—-why not take the road least taken–true tax reform

  3. jill Says:

    These two article disclose the fact that the U.S. State Department through the United States Agency for International Development will provide millions of U.S.taxpayer dollars to train foreign workers to work in American outsourced factories. This program is in effect in South Asia and will be extended now to Armenia.

    I find this information very hard to understand. What do you suppose unemployed Americans feel about this?

    Maybe the next time you are on TV you could bring up this issue. I believe it would disturb most Americans.

  4. John Treichler Says:

    Yra – Thanks for the response.
    Not to get into a lengthy exchange because I know you’re busy. But, … 🙂

    What tax policy would you suggest that would encourage real markets in the USA into which local USA businesses could confidently expand?

    I’m guessing that foreign governments could always intervene in the currency markets to revalue-downward their currency values to overcome any tax advantages. Besides, we need to earn profits before tax advantages become useful at the bottom line. Businesses can’t earn profits in markets where foreign businesses undercut USA businesses through the currency markets.

    Your insights in the use of tax policy greatly appreciated. Noone else has given a credible approach besides just advocating lower taxes [supply side Keynesian economics].

    Kind regards,

  5. John Treichler Says:

    Sorry Yra –
    I really meant to say that I’d greatly appreciate receiving your thoughts on an approach using tax incentives that enables USA markets.

    Kind regards,

  6. John Treichler Says:

    Joe –
    Appreciate the response. I agree that honest money, a system along the lines of Real Bills with net settlement in commodities/metals [the world-system up to about 1908 per Prof. Antal E. Fekete’s writings] will work better than floating fiat currencies so subject to use as instrument of national power.

    However, until the re-arrival of honest money, or devaluation of $US with its own unique set of problems, or the use of tariffs to level the currency pegging, or the wholesale rejection of NAFTA and/or GATT, what other policy will result in industrial and agricultural markets being available in USA for USA small businessmen?

    With respect, what’s your approach?

    [Yra – appreciate the opportunity to post my thinking here and get thoughtful responses.]

  7. Arthur Global Practice Says:

    … sooner or later Barack Obama will have to break his election promise and raise taxes on the US middle class.

  8. yra Says:

    John–when I say taxes I mean comprehensive tax reform.Low corporate taxes and then as flat an income tax as possible–but it must also come with a review of the entire budget from A-Z or what was proposed 18 years ago by several in congress—everybody’s ox must be gored for that is real leadership and its time has come.I believe that real tax reform will beget real campaign finance reform for the two issues are tied at the pockets of the influential

  9. John Treichler Says:

    I see that. Thanks for the response.

  10. Haines: Tax Cuts Do Contribute to Nation's Deficit - - current events, politics, culture, ethics, economics discussion forum Says:

    […] of the economy, we would expect Romer to raise her voice in opposition to the tax increase. Notes From Underground: Bye bye Christina Romer Notes From Underground And that's why economy isn't all that simple. You're right but so is Romer, in all likelyhood. […]

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