The Region

Christina and David Romer

In times of financial turmoil, it is comforting—or at a minimum, illuminating— to receive counsel from those with long-term perspective. Tempered with the lessons of history, their views extract true trend from distracting noise. Guided by precedent, shaped by narrative, checked against data, the conclusions of economic historians are formed slowly and carefully. In the realm of U.S. monetary history, few economists are as qualified to provide such counsel as and David Romer of the University of California, Berkeley. Since 1985, when both received their doctorates from the Massachusetts Institute of Technology, the two have co-authored some of the field’s central analyses of policymaking, based on thorough scrutiny of Fed documents and painstaking empirical investigation. They’ve made fundamental contributions to the literature on fiscal policy as well. Individually, Christina is well known for her research on the Great Depression and David for his work on microeconomic foundations of . While their topics and methods are orthodox, their conclusions are often unsettling. Attempts by members of the Federal Open Market Committee to add information to Fed staff forecasts “may lead to misguided actions,” the Romers wrote recently. Monetary policymaking has improved since World War II but not steadily, they’ve concluded; policymakers have gone astray when they deviated from sound economic theory. Contrary to conventional wisdom, the Romers have found, government spending is not reined in by tax cuts. And, according to a celebrated, if “offbeat,” analysis by David, football coaches should be much more aggressive on fourth down. The following conversation with the Romers covers this research as well as their work as co-directors of the monetary economics program of the National Bureau of Economic Research, their thoughts on asset prices as a focus of , the benefits of research collaboration with one’s spouse and, indeed, their perspective on current U.S. economic turmoil.

Photography by Peter Tenzer

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TAXES AND SPENDING cuts relative to what it otherwise would have been. Region: You recently wrote a very intriguing paper about the interplay Region: I was quite surprised by that. between tax changes and government spending. Would you give us a brief Christina Romer: We didn’t know what description? we were going to find. One of the stress - ful things about the type of narrative David Romer: Well, a major motivation research we do is that it involves a huge that people have put forward for cutting amount of work before the first regres - taxes is their concern that government is sion can be run. But in this case, we too large. They think that the direct thought the results would be interesting approach of going through the political whichever way they came out. process to cut spending is very difficult, and so the best strategy is to cut taxes. Region: But you did find that tax cuts The idea is that this will reduce the rev - We find … no evidence for starve-the- were followed by something else. enues that Congress has available, and over time that will force spending down. beast. There’s no systematic tendency for CR: Right. Tax cuts led, eventually, to tax This is something that Ronald Reagan spending to fall after tax cuts relative to increases. Basically, something has to was very explicit about. It was one of the what it otherwise would have been. give; there is a government budget con - motivations for his tax cuts, and it goes straint. What we thought gave when you under the name of the “starve-the-beast” David Romer cut taxes was spending, but we seem to hypothesis. The “beast” is government find that in postwar U.S. history what and its “food” is the revenues. Despite its In postwar U.S. history what actually actually gives is the tax cut itself. A sub - importance, there’s been very little gives is the tax cut itself. A substantial stantial fraction of a tax cut is typically empirical work on this, and most of that undone in the subsequent five years. fraction of a tax cut is typically undone work boils down to looking at correla - tions: When revenues go up or down, do in the subsequent five years. FORECASTING AND THE FOMC we later see spending move in the same Christina Romer direction? But a theme that runs through Region: Let me jump now to monetary a lot of our work is that simply looking at policy. Another provocative recent correlation is often very misleading for the same direction. But if you listen to paper was your analysis of Federal Open getting at causation. the history I just described, it’s clear Market Committee versus Fed staff fore - In the context of the starve-the-beast that, in fact, causation went from the casting ability, in which you basically theory, my favorite example of the issue decision to raise spending to the deci - found that the FOMC doesn’t add much of correlation versus causation is the fis - sion to raise taxes. value. Is that an accurate summary? cal history of the Korean War. The What we try to do in a lot of our work North invaded the South at the end of is bring in additional information from CR: It is, or at least it’s accurate as far as June 1950. A month later Truman took a history to try to get at causation. In the we’ve gone. This is our first pass at this few minutes out from planning the mil - paper on the starve-the-beast hypothe - topic. There’s a limited amount of data itary response and wrote to Congress to sis, we go through the history of tax on the FOMC forecast and the staff fore - say that we needed a massive tax changes and take out the ones that are cast that comes out of the Monetary increase because we were going to have motivated by decisions that had already Policy Reports that are done twice a year. to ramp up military spending. A big tax been made to increase spending, take We’ve been trying to get the actual data increase was passed and put into effect out ones that are coming not from poli - on the forecasts of each member of the three months after the invasion. We cy at all but from developments in the FOMC so that we can do more thor - really hadn’t succeeded in increasing economy, and the like. We try to isolate ough tests. We have an ongoing discus - military spending at all at that point. changes in taxes that seem truly legiti - sion with the Fed trying to get those So if you look just at the data, you see mate for testing the starve-the-beast data. that taxes went up and spending went hypothesis. But the first pass at this certainly up afterwards. If you look at correlation, And what we find is no evidence for found that the FOMC has very little it looks like a great example of tax starve-the-beast. There’s no systematic value added when it comes to forecast - changes causing spending to change in tendency for spending to fall after tax ing: Once you know the staff forecast,

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you can pretty much throw away the cated that the Fed had some private FOMC forecast. information. My impression is that most econo - Region: And you also found that diver - mists don’t think the Fed has a lot of pri - gences between the two led to policy vate information. Are they wrong about shocks. that, or is it that the amount of private information has diminished given CR: Yes, though that part of the paper is greater policy transparency since the more suggestive than conclusive. We period you analyzed? looked at whether times when the FOMC’s forecast is quite a bit different DR: I think the label “private informa - from the staff’s seem to be correlated tion” is potentially confusing, and actu - with the FOMC doing something ally the published version of the paper unusual on the policy side. We find that just refers to “Federal Reserve informa - it does seem to be. tion.” We don’t think the Fed is making The first pass at this certainly found that better forecasts because some people DR: If you think about how the Fed there are collecting the industrial pro - works, the forecasting results make a lot the FOMC has very little value added duction data or because they have con - of sense. First of all, there is a huge when it comes to forecasting: Once you tacts on Wall Street who are giving them number of staff economists, and they’re know the staff forecast, you can pretty special information. very well-trained at forecasting. They We think that the sense in which the devote enormous, enormous effort to it. much throw away the FOMC forecast. (CR) Fed has better information is that they So it really does seem like that’s the take the mass of publicly available staff’s comparative advantage, and it The role the FOMC should focus on, data—ranging from published govern - would be surprising if the FOMC had a their comparative advantage, is making ment series to anecdotes about what’s lot of value to add to that. happening at Macy’s this week—and do judgments. Their role shouldn’t be to But what we really take from this is a much better job of turning those data that the role the FOMC should focus on, engage in economic forecasting … but into a forecast. their comparative advantage, is making rather to make the value judgments judgments. Their role shouldn’t be to CR: What David is describing is closely about outcomes. (DR) engage in economic forecasting or to say related to what we said about the FOMC what the effects of different policies are versus the staff. No private forecaster, just likely to be, but rather to make the value take it on inflation? Do you take it on like no member of the FOMC, puts the judgments about outcomes. “If we output? There’s a trade-off there. resources into forecasting that the Fed choose this policy, here’s what the staff Someone’s got to make the judgment does. It has hundreds of Ph.D. economists, tells us the likely outcome is,” they call, which path do we want to take? not to mention all the people at the region - might say. “And we could make this There’s not one that’s necessarily objec - al banks. So we think that it’s a processing choice and go down this path. This is tively right, that every economist would advantage, not getting the data sooner or the point estimate and the uncertainty. say, “Of course, this is what you should having secret contacts or whatever. Now, as representatives who’ve been do.” It’s going to be a value judgment On the issue of whether this is a com - appointed through the democratic that should be made by people who have mon view, I think the question of process, which path do we think is bet - been appointed and confirmed through ter for society?” That clearly is not the democratic process. something that should be delegated to No private forecaster, just like no member the staff; it’s absolutely something that PRIVATE INFORMATION of the FOMC, puts the resources into the FOMC should be doing. forecasting that the Fed does. It has Region: Let me ask a question about Region: So it’s a deliberative role, not an “private information” in relation to fore - hundreds of Ph.D. economists, not to analytical function. casting. I think it was in 2000 that you mention all the people at the regional wrote a paper looking at the Fed’s abili - banks. … Our empirical evidence says CR: I think it’s somewhat deliberative, ty to forecast inflation and output versus but it’s more a value judgment. You’re private forecasters’ ability and found that they have some information relative confronted with a supply shock. Do you that Fed forecasts were better. That indi - to private forecasters. (CR)

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whether the Fed has useful information found was a more complicated evolu - is an empirical one. It’s not one we should tion. We found that in the 1950s, policy - try to answer from the seat of our pants. makers didn’t have a sophisticated And, we certainly think that our empiri - model of the economy, but in its basics, cal evidence says that they have some it was actually pretty good. They had a information relative to private forecast - sense that inflation was bad. They had a ers. I think it’s been confirmed, hasn’t it? sense that there was a kind of capacity constraint to the economy, and that if DR: I think so. [Princeton economist] you tried to push the economy too far, Chris Sims has a paper on this eventually you wouldn’t get any benefits [http://sims.princeton.edu/yftp/bppolic y in terms of lower ; all /bpPolicy.pdf]. He came to the same you’d get is inflation. It was a sort of conclusion. There are a lot of statistical proto-natural-rate kind of view. As a results out there of the “Is the t-statistic result, policy was also pretty good. It 1.8 or 2.2?” variety. But the results about wasn’t perfect—they were certainly doing Fed information aren’t in that category. the sort of “stepping on the gas, stepping I think we’re both pretty strongly of the This is something that statistically is on the brakes” that Milton Friedman overwhelming. If you know a high-pro - always criticized—but overall, the basics view that the Great Moderation—the file commercial forecast of inflation and were pretty good. Inflation was kept in excellent performance of the U.S. someone handed you the Fed Greenbook, check and recessions were brief. macroeconomy over the last quarter the evidence is very strong that you would Then what we see is deterioration in want to put almost complete weight on the the 1960s and ’70s. In the process of try - century—is not just luck. A big part of Greenbook. ing to add better analytics, policymakers it is improvements in the conduct of in fact took a giant wrong turn in under - monetary policy related to improvements CR: I do think that there is a question of standing how the economy operates. whether the Fed’s advantage may have They first had the idea that there was a in economic understanding. (DR) changed over time. There certainly have permanent trade-off between inflation been big increases in Fed transparency. and unemployment, so if we were just Region: You call it “sensible and sophis - To the degree that there’s more signaling willing to have more inflation, then we ticated.” now of “here’s what we’re thinking and could permanently lower unemployment. here’s where we’re going,” the Fed’s That view disappeared pretty fast, but CR: This is in contrast with the 1950s, informational advantage may have less - then policymakers replaced it with a which was sensible but clearly crude. ened over time. natural rate of unemployment view The modern framework has a lot of where they thought the sustainable level sophisticated features that policymakers EVOLUTION OF UNDERSTANDING of unemployment was, maybe, 3 per - in the 1950s didn’t have. The important cent. Then we see Arthur Burns in the thing is that these sensible views have Region: At the Kansas City Fed’s 2002 early 1970s struggling with the fact that led, by and large, to moderate, well-tem - Jackson Hole symposium, you spoke that didn’t seem to be right. So he added pered policy. The result has been low about the “Evolution of Economic the idea that maybe monetary policy inflation and remarkably steady growth Understanding and Postwar Stabilization just can’t do anything—that inflation over the past 25 years. Policy.” You identified three distinct doesn’t respond to slack. So another phas es in that evolution, ending in the twist and turn, but a wrong turn. Policy Region: And your notes of caution and 1990s with a sophisticated model that in this period reflected these views—it optimism? seemed sensible. And you said this sug - was wildly overly expansionary most of gests “both a note of optimism and a note the time, with a few half-hearted mone - DR: The optimism is to say that we’ve of caution about the future of stabilization tary contractions aimed at controlling now had monetary policy run on a very policy.” Would you describe those phases inflation thrown in. sound basis for 25 years. I think we’re and elaborate on those notes? Not until the Volcker, Greenspan and both pretty strongly of the view that the now Bernanke era do you get a basically Great Moderation—the excellent per - CR: I’ll start with the phases. There’s a pretty sensible model—the view that formance of the U.S. macroeconomy desire to think that we gradually learn inflation is bad, the sustainable rate of over the last quarter century—is not just things over time, and so we get gradual - unemployment is moderate and infla - luck. A big part of it is improvements in ly better and better policy. But, what we tion will respond to slack. the conduct of monetary policy related

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to improvements in economic under - Issues of credibility and rational big picture of what happened, rational standing. That’s the optimistic note, that expectations surely can matter and expectations isn’t central. But if you maybe good ideas and good policy can want to get into a quantitative account continue. surely are something that any good and match the numbers, then that The note of caution is that we haven’t monetary policymaker should be thinking becomes something to consider. So, it’s had a monolithic march toward better about. But in terms of explaining why on the list, but it’s not one of the top and better knowledge. So if people get ones for the period we were looking at. complacent and start appointing people policy went so astray in the early who have misguided ideas to the 1970s … we think that’s not the A FOURTH PHASE? Federal Reserve, we can have a backslid - best place to look. (CR) ing. Region: It’s too early to write our history The paper I’d cite that I think is very about the current period, of course, but CR: Another wrong turn. supportive of this comes very much people are again talking about stagfla - from a rational expectations learning tion, and I guess it comes to a question DR: Yes, another wrong turn in how pol - tradition. It’s by [Northwestern University of, What have we learned after all? Is the icy is conducted. And so that’s some - economist] Giorgio Primiceri in the 2006 Great Moderation over? Have we entered thing we have to be vigilant about. We Quarterly Journal of Economics . It uses a a fourth phase? have to think about ways to ensure that sophisticated “Sargent-esque” learning monetary policy is consistently run on model, but finds that learning about just CR: The key question is what happens the basis of the best available ideas a few variables—the estimates of the from here. For the Great Moderation, about how the economy works. natural rate and the sensitivity of infla - we believe that good policy was a crucial tion to deviations from the natural part. But another thing that a lot of the THEORETICAL PROGRESS rate—can explain the evolution of poli - studies have found is that during the cy and outcomes incredibly well. So Great Moderation, we didn’t have big Region: From my reading of the sympo - again, I think it’s an empirical issue, not shocks. For example, we didn’t have a lot sium proceedings, it seemed there was a a theoretical or methodological issue. of oil price shocks. fair amount of criticism from the dis - cussant [NYU economist Thomas DR: The other example I would add Sargent] and others, saying among other besides the one of what went wrong in things—and I’m from Minnesota so I the 1970s is what finally went right have to bring this up—that your analysis when Volcker came in. The crucial left out major theoretical advances, such thing was that Volcker had a much more as rational expectations and the time sensible view of how the economy oper - inconsistency problem, among others. ated, and he took actions consistent Is it your view that these theoretical with those views. He said, in effect, advances don’t have much of a role in “Okay, look, we have to get inflation improved policy? down. Monetary policy is capable of doing that. The natural rate of unem - CR: I think our view is that to under - ployment is pretty substantial, so to stand what went on in U.S. macro histo - reduce inflation we’re going to have very ry, these things aren’t crucial. Issues of tight policy and the unemployment rate credibility and rational expectations is going to have to go quite high.” surely can matter and surely are some - As things turned out, it was actually thing that any good monetary policy - less costly to bring inflation down than has been dealt just a maker should be thinking about. But in most economists had expected, and a rotten hand; there are awful shocks terms of explaining why policy went so likely reason is that at some point peo - hitting the U.S. macroeconomy. The issue astray in the early 1970s, it wasn’t time ple started to realize that the Fed was inconsistency, it wasn’t failing to take really serious. The Fed gained some is going to be, What do we do from here? credibility into account. It was Arthur credibility, and so you didn’t have purely There’s no way, confronted with some Burns saying things like, “Monetary mechanical backward-looking expecta - of these things, that you can have low policy can’t do anything.” So in terms of tions. You got kind of a credibility or the source of the big policy mistakes, we rational expectations kick. inflation and 4 percent real growth think that’s not the best place to look. So if you want to describe the very every year. (CR)

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We’re now in a nasty period. Ben CR: I like David’s point about big rises in Bernanke has been dealt just a rotten asset prices as an indicator that maybe hand; there are awful shocks hitting the the economy is too hot, or that they’re U.S. macroeconomy. The issue is going one of the things that you should look to be, What do we do from here? There’s at. In thinking about the Greenspan era, no way, confronted with some of these there’s a tendency for people like [for - things, that you can have low inflation mer Fed Governor] Larry Meyer to say, and 4 percent real growth every year. “Oh, Alan Greenspan was so much What we don’t have to do is what they smarter than I was because he realized did in the 1970s, which is to compound that the unemployment rate could go bad shocks with bad policy. The Fed ran down to an incredibly low level.” massively expansionary monetary poli - I’m not sure that’s right. In some cy at a time when conditions didn’t war - sense maybe we were taking things too rant it. The result was very high infla - far. Being aggressive in seeing just how tion, followed by massively high unem - good we can make things in the short ployment to get it down. run might be setting up these kinds of It might be best to think not in terms So I think the real question is going bubbles. I think we might want to take to be, What’s the line we walk from of trying to manage asset prices or rapid asset price increases as one indica - here? Think about the action we saw just identify fundamental values, but rather tion that we should be following a more today [June 25], where the FOMC didn’t moderate policy. that rapid increases in asset prices keep lowering the federal funds rate. It said, “We’re probably through the worst are another indicator of potential CHOOSING A CHAIR in the financial markets; we had to fight overheating. (DR) that fire, but now we’re going to look at Region: In 2004, you wrote a paper with what’s happening to inflation. There are lessons about selecting a Fed chair. You benefits to low inflation, and so we’re concrete example of this is that when suggested that the best way to predict going to have to think about how much Alan Greenspan gave his famous irra - what a chair would do was simply to we stimulate the real economy and how tional exuberance speech, the Dow- read what they’d written. About two much we’re concerned about inflation.” Jones average was at something like years later, Ben Bernanke was sworn in The fact that the FOMC is thinking this 6,000; it eventually fell, but it had risen a as chair. He’s been there for about two way suggests that even if they don’t do great deal more before it fell. So in ret - and a half years. everything exactly right, they’re not rospect it looks like 6,000 was not too Have your lessons held up? In other going to make the sorts of huge mistakes high for the Dow at that time. words, do you feel that Bernanke’s writ - policymakers made in the 1970s. I think the bigger issues are that rapid ings and his testimony were an accurate run-ups in asset prices, first of all, tend predictor of what he’s done, of the pol- ASSET PRICES to stimulate the economy a lot, and sec - icy he’s pursued? ondly, can be followed by declines. So it Region: It’s long been Fed doctrine that might be best to think not in terms of CR: Yes, I think they were very much so. we really don’t have the ability to iden - trying to manage asset prices or identify We argued that what you are looking for tify asset price bubbles with great accu - fundamental values, but rather that in the record is the potential chair’s racy, nor address them with alacrity. rapid increases in asset prices are anoth - framework about the economy. What But given the housing market, the dot- er indicator of potential overheating we learned from preparing the com bust—given much of this past that the Fed might want to consider in “Evolution of Economic Understanding” decade, I guess—some policymakers how it conducts policy. To me that paper is that policy tends to go astray are reconsidering whether asset prices makes sense. when people have “wacky” views about should be a focus of Fed policy. What is I think it’s really framing the issue in how the economy works. your view? a confusing way to try to focus on the When you read G. William Miller, for question of the Fed directly managing example, you can just tell that he doesn’t DR: I’ve always been of the view that it’s asset prices or trying to have its own have a sensible framework. It’s a frame - very hard to identify an asset price bub - view of what fundamentals should be. I work that would lead you to an overly ble, and I don’t think the Fed should be think that’s not where the Fed should be. expansionary policy. When you read in the business of trying to determine But I think they should still be thinking Ben Bernanke’s statements and papers, what fundamental values are. A nice pretty hard about asset markets. you see a very sensible framework and a

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reasonable view of what the Federal view about whether they were wise or Reserve can and cannot accomplish. I not. But I don’t think they’re the big pic - think the actions he has taken are con - ture of what the Fed has been doing. sistent with the views he expressed before becoming chair. CR: I agree. Why was the Fed created? So, we’d view Chairman Bernanke as The Fed was created because we’d gone a triumph for our paper. In fact, if you through several devastating financial were to read our paper and ask who panics in the late 1800s and early 1900s. would be the perfect person, it probably So, faced with what could have turned would have been either Stan Fischer or into a panic in 2008, the Fed responded Ben Bernanke—that’s what came out of aggressively. It’s exactly the textbook our analysis. description of what they should have And again, Bernanke has been dealt a done. Now the innovative things, such horrible hand—the meltdown in finan - as lending to investment banks, raise big cial markets, the collapse of housing regulatory issues that I think someone prices, huge oil price shocks—and I needs to be thinking about a lot—mak - I do worry that monetary economics think the Fed has done a good job of ing sure they’re dealing with them cor - trying to navigate us through this. rectly. But again the big picture was, don’t may be narrowing … we may be losing let the New York financial market go the empirical side. … To the degree Region: One of the steps the Fed has under because it would have devastating we’re trying to do any social engineering, taken is creating vehicles to open up the real economic consequences. That was credit window more broadly. How exactly the right focus for policy. it’s to try to encourage the breadth important are these recent innovations of empirical studies. (CR) in terms of Fed policy history? NBER AND MONETARY ECONOMICS DR: I’m not enough of an expert on this So if you think of it that way, it’s a lot of to know, but I think this is not really the Region: In a couple of weeks, you’ll head things. It obviously includes a wide range big issue in the context of policy. The to Boston to lead the monetary eco - of macro topics, but it may also get into big issue is that, faced with problems in nomics workshop of the National the microeconomics of price setting and financial markets, the Fed responded Bureau of Economic Research. It runs financial market regulation. Anything aggressively, after a little bit of a delay, five straight afternoon sessions, 14 that gets you information on how the with easing. That seemed extremely papers, I think. I was struck by the macroeconomy operates we think is fair appropriate. I start from a fairly tradi - diversity of presentations, from a Larry game. Subject to that constraint, we just tionalist view, that the right thing for the Summers discussion on recent develop - look for the best papers and try to be pret - Fed to do if the economy is in trouble, ments in financial markets to a paper by ty aggressive in getting what we think is rather than trying to identify particular two young Harvard economists on fre - good and exciting research, so people problem areas in financial markets that quency of price changes and exchange come and it’s an interesting meeting. need intervention, is to provide lots of rate pass-through. liquidity and keep interest rates low. I How long have you run this group? DR: I think we are very committed to haven’t studied the case for these more the diversity of approaches to empirical innovative steps enough to have a firm CR: I have to think. Is it four years? work. So you’ll see some very high-tech, Bayesian time-varying parameter VAR DR: That’s what I was going to say. sorts of papers; you’ll see things in eco - When you read Ben Bernanke’s nomic history; you’ll see researchers statements and papers, you see a very CR: On the content, we deliberately take who’ve gone out and talked to people at sensible framework and a reasonable a very inclusive role of what counts as firms about how they went about monetary economics. The unofficial changing the prices for a line of prod - view of what the Federal Reserve can definition of monetary economics that ucts. People who attend the workshop and cannot accomplish. I think the we inherited, going back to Greg seem to appreciate that whole range of actions he has taken are consistent Mankiw and Ben Bernanke, who ran approaches. this program before us, is that it’s any - with the views he expressed before thing monetary policymakers should be Region: Four years as co-chairs may not becoming chair. (CR) interested in. be a long enough perspective to answer

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this next question, but you’ve certainly DR: Exactly. We can be more frank in been attending the workshop for longer. our criticism because there’s plenty of Given where we are now with monetary time to iron out the differences. If one of policy, do you feel that monetary econ - us isn’t happy with the way someone has omists at the NBER, and overall, have organized a section, we’re not shy about been investigating the right questions, expressing that. For one of our papers, I have they had the right research focuses? have a stack of outlines. On the bottom is #1, on top of that is outline #2, and CR : Oh, that’s a good question. I think then outlines #3 and #4. We went back yes and no. The nice thing about the and forth just trying to organize it. way research is done is, it’s a thousand flowers blooming. People are just try - CR: We often say that the professional ing lots of different things. Some of collaboration solved all the bargaining them have proved to be very exciting issues in the marriage. Normally it’s, and useful, and some of them have Who does the laundry? or Who washes been less so. the dishes? Well, for us it’s, I’ll wash the David: My sense is that the collaboration I do worry that monetary economics dishes, I’ll play with the kids, you go may be narrowing. For some econo - is closer than it is in many co-authorship write the computer program. Given that mists using a standard DSGE [dynamic relationships, in a couple of ways. there’s lots of work to do, it certainly stochastic general equilibrium] model, First, I think we do more steps of the makes it easy to negotiate over who does it’s becoming “let’s change this equa - what. tion, let’s change that one.” I worry that research together. … The other way the we may be losing the empirical side. I collaboration is closer is, I think, we’re— SEPARATE PIECES worry that we’ve gone too far into “let’s just calibrate this, let’s check this Christina: We can be brutally frank. Region: Of course, you’ve also published covariance.” I sure hope people will papers separately, and I’d be remiss if I keep thinking along the lines of, Is David: Exactly. didn’t ask David about football. Can you there an innovative way of testing this? tell me about your famous 2006 Journal Is there a variable we haven’t thought of Political Economy paper, “Do Firms of? Is there a natural experiment? To closer than it is in many co-authorship Maximize?” the degree we’re trying to do any social relationships, in a couple of ways. First, engineering, it’s to try to encourage the I think we do more steps of the research DR: [Laughs.] That was a completely breadth of empirical studies, so we together. We spend a lot of time togeth - offbeat paper. The initial motivation don’t narrow too much. er in front of the computer or flipping really was just the narrow question of Do you agree? through documents. Someone recently whether football coaches are getting a asked which of us had done the classifi - particular decision—what to do on DR: I do. cation of the tax changes by motivation fourth down—right. I found it intrigu - for our work on fiscal policy. And we ing, and at some point I found I had the COLLABORATION both sat in awkward silence because the tools to address it. And I got a bunch of question made no sense to us. Finally, undergraduates to help me gather the Region: I’ve long been interested in the we said, “We did it together.” One of us data. It was in some sense a paper that process of collaboration among schol - might take the first pass at reading the wrote itself. The number of undergrad - ars—how topics are chosen, labor divided, documents for a particular episode, and uates who responded to the e-mail of disputes resolved—but I’ve never consid - if it was straightforward, that was the “Would you like to work on a project ered how marriage might play into that. end of the matter. But if there was any about football?” was just astronomical. You’ve co-authored many papers, run subtlety or disagreement, room for I find it interesting in various ways. the monetary economics workshop for ambiguity, then we’d both study the The way that’s emphasized in the pub - four years and made a wide range of record, and we’d make the case back and lished version is that it’s a way of testing employment decisions together. How forth until we resolved things. The other something that’s very difficult to test would you describe your working rela - way the collaboration is closer is, I normally. We can test whether individu - tionship? think, we’re— als make maximizing choices, but it’s much harder for firms because the deci - DR: My sense is that the collaboration is CR: We can be brutally frank. sions are more complicated, and the

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More About Christina Romer More About David Romer

Current Positions Current Positions Class of 1957 Professor of Economics, University of California, Berkeley, Herman Royer Professor in Political Economy, University of California, since 1997. Joined Berkeley faculty in 1988; promoted to full professor in Berkeley, since 2000. Joined Berkeley faculty in 1988; promoted to 1993 full professor in 1993 Co-director, Program in Monetary Economics, National Bureau of Economic Co-director, Program in Monetary Economics, National Bureau of Economic Research, since 2003; Business Cycle Dating Committee since 2003; Research, since 2003; Business Cycle Dating Committee since 2003; Research Associate since 1990 Research Associate since 1993

Previous Position Previous Positions Assistant Professor of Economics and Public Affairs, Assistant Professor, , 1985–88 Woodrow Wilson School, Princeton University, 1985–88 Visiting Professor, Stanford University, Fall 1995; Visiting Associate Professor, Spring 1993 Professional Activities Visiting Assistant Professor, Massachusetts Institute of Technology, 1988 Vice President, American Economic Association, 2006; various committees since 2001 Professional Activities Various committees, Economic History Association, since 1995 Executive Committee, American Economic Association, 2007–10 Editorial board, American Economic Journal: , since 2007; Editorial board, American Economic Journal: Macroeconomics, since 2007; Review of Economics and Statistics, 1994–2002; Journal of Economic Journal of Money, Credit and Banking, since 1992; B.E. Journals in History, 1994–97 Macroeconomics, 2000–06; Economics Letters, 1992–2003; American Training Seminar on the Great Depression, International Monetary Fund, Economic Review, 1996–2002; Quarterly Journal of Economics, 1990–98 2002, 2003, 2005 Honors and Awards Honors and Awards Fellow, American Academy of Arts and Sciences, since 2006 Fellow, American Academy of Arts and Sciences, since 2004 Adviser of the Year Award, University of California, Berkeley, John Simon Guggenheim Memorial Foundation Fellowship, 1998–99 Graduate Economic Association, 1999, 1993 Distinguished Teaching Award, University of California, Berkeley, 1994 Teacher of the Year Award, University of California, Berkeley, Graduate Economic Association, 1998 National Science Foundation Presidential Young Investigator Award, 1989–94 Alfred P. Sloan Research Fellowship, 1991–93 Alfred P. Sloan Research Fellowship, 1989–91 Valedictorian, Princeton University, 1980 National Bureau of Economic Research Olin Fellowship, 1987–88 Publications

Publications Author of Advanced Macroeconomics, McGraw-Hill. 1st ed., 1996; 2nd ed., 2001; 3rd ed., 2006 Co-editor, with David H. Romer, Reducing Inflation: Motivation and Strategy, University of Chicago Press for NBER, 1997 Co-editor, with Christina D. Romer, Reducing Inflation: Motivation and Strategy, University of Chicago Press for NBER, 1997 Author of numerous journal articles, with research focused on the effects and determinants of monetary policy, economic fluctuations over the 20th Author of numerous journal articles, with research focused on the effects century, the causes of the Great Depression, the history and effects of fiscal and determinants of monetary policy, microeconomic foundations of policy, and historical macroeconomic data Keynesian economics, empirical evidence on , the history and effects of fiscal policy, and stock market volatility Education Education Massachusetts Institute of Technology, Ph.D., 1985 Massachusetts Institute of Technology, Ph.D., 1985 College of William and Mary, B.A., 1981 Princeton University, A.B., 1980

21 SEPTEMBER 2008 The Region

data usually aren’t available. Austin, Texas, and they wanted a talk Another thing I like about the paper about macro policy in the 1960s. The is that it’s an illustration of how analyti - question I focused on was, What went cal tools can be useful. I’ve given semi - wrong? And the answer is, Basically, bad nars on this paper to undergraduates in ideas. There was a revolution in ideas, the math department. I’ve gone to a jun - but it was a misguided revolution. ior high school math class to say, “Here’s We’ve already talked about the something interesting you can do with change in ideas about short-run stabi - math that you wouldn’t have expected.” lization—thinking we could buy our - So it was an interesting diversion from selves lower unemployment by just other things that I’ve done. accepting some inflation. The thing I added in this paper was the long-run fis - Region: And you found that—? cal side. We not only had a revolution in our views about how the macroecono - DR: The bottom line is that if the goal is my works in the short run, but also a to win football games, teams should be change in views about the importance of The bottom line is that if the goal is to dramatically more aggressive on fourth long-run budget balance. The paper down. They should go for it much, win football games, teams should be looked at how that evolved. much more often. I focused on situa - dramatically more aggressive on fourth What’s very striking is that we had a tions early in the game with the score pretty sensible long-run fiscal view in down. They should go for it much, much tied, so time and score aren’t issues, and the 1950s—the budget should be bal - found that at fourth and short yardage more often. (DR) anced over the medium run, but not pretty much anywhere on the field, you each and every year and not in excep - should go for it. If you’re down close to They all say, “I always knew they should tional circumstances. And, policy choic es the goal line, you should try for the be going for it on fourth, and now you’ve reflected that view—the budget was bal - touchdown. shown it!” anced on average, but not in recessions The main place the math comes in is and not during wars. in thinking through the whole chain of Region: I doubt you’ve gotten quite as But views took an unfortunate turn events after the fourth down play. In the much attention for your recent presen - in the 1960s and ’70s. Policymakers example of fourth and goal near the goal tation to the Economic History started to believe that budget balance line, if you go for the touchdown and Association on macro policy in the was not important even over an extend - you fail, then you’ve lost the three points 1960s, but I found it equally interesting. ed horizon, and that tax cuts would pay you would have gotten from a field goal, Would you tell us about it? for themselves. And views took another but you’ve left the other team in really wrong turn in the 1980s, when policy - crummy field position, and that partial - CR: That paper built on the work we did makers added notions such as the ly offsets the fact that you didn’t get the on the “Evolution of Economic starve-the-beast hypothesis that tax cuts three points. And what you find when Understanding,” but added some of would force spending cuts. I think these you do the analysis is that that’s a very what we were learning from our new are wrong turns that we haven’t corrected big consideration. work on fiscal policy. yet—as evidenced by our ever-worsening The EHA was having a session at the long-term fiscal outlook. That’s the big CR: The very sad and ironic thing is that Lyndon Johnson Presidential Library in picture that came out of this study. now football teams are going for it less often on fourth down than before David Region: Thank you both very much. wrote this paper! The armchair psychol - Views took an unfortunate turn in the ogist view of it is that they don’t want to 1960s and ’70s. Policymakers started —Douglas Clement be doing what the academic egghead to believe that budget balance was June 25, 2008 says they should. They want to be fol - lowing their own route. not important even over an extended horizon. … I think these are wrong turns Region: So, David shaped the game. that we haven’t corrected yet—as

CR: But in the wrong direction. The evidenced by our ever-worsening other side of it is, the fans love him. long-term fiscal outlook. (CR)

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