425. Remembrance of Economic Crises Past

Christina Romer was a top White House economist during the Great Recession. As a researcher, she specializes in the Great Depression. She tells us what those disasters can (and can’t) teach us about the Covid crash.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

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• 2:13Stephen J. Dubner?

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• 2:26Stephen J. Dubner?

  So what's it feel like as an economic historian to be living through a moment that's plainly historic from an economic perspective?

• 2:34Speaker 01

  It is sort of mind blowing. I remember back from the 2008 recession, I'd said to myself, well, I never thought in my life I'd live through a bank run. And here were people lining up outside banks. Now I'm living through a pandemic. It is just really hard to fathom.

• 2:58Stephen J. Dubner?

  That is Christina Romer.

• 3:00Speaker 01

  I'm a professor at the University of California, Berkeley.

• 3:04Stephen J. Dubner?

  She is a scholar of economic catastrophe, the Great Depression in particular. She was also chair of President Obama's Council of Economic Advisers at the start of his first term during the darkest days of the global financial crisis. She had been surprised to get that job.

• 3:21Speaker 01

  And several months later, I was talking to Rahm Emanuel, the president's chief of staff, and I said, by the way, can you just tell me why I got this job? And he said, you were an expert on the Great Depression, and we thought we might need one.

• 3:36Stephen J. Dubner?

  It did take several years, but the US and global economies recovered from that catastrophe, recovered pretty well at least. But now, the COVID-19 pandemic has produced an economic threat that borders on the existential.

• 3:50Speaker 02

  In the first quarter this year, the GDP shrank by 4.8%. Nearly 46 million jobless claims have been filed in the last three months.

• 3:58Speaker 03

  Some advisers to the president are warning of unemployment numbers straight out of the Great Depression. The Great Depression.

• 4:04Speaker 04

  This is way worse than anything we saw in the Great Depression.

• 4:07Stephen J. Dubner?

  And so with everything going on right now, we thought it'd be good for us to consult a Great Depression expert, if only to help us make sense of it all. Today on Freakonomics Radio, Christina Romer tells us the valuable lessons we can draw from the past.

• 4:22Speaker 01

  I still feel we should have done even more.

• 4:26Stephen J. Dubner?

  She lists the current priorities.

• 4:28Speaker 01

  It is the single biggest thing that needs to be done very quickly.

• 4:33Stephen J. Dubner?

  And whether we'll make it out OK on the other side.

• 4:37Speaker 01

  I mean, the history of this country is rising to challenges.

• 4:53Speaker 05

  From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 5:11Stephen J. Dubner?

  The National Bureau of Economic Research recently declared that the US economy went into recession all the way back in February. Christina Romer sits on the committee that makes such declarations. For the past few decades, she has studied the causes and consequences of economic downturns. Why did she choose such a cheerful topic?

• 5:30Speaker 01

  For an economist, there's almost nothing that matters as much in people's lives as whether they have a job, whether they can support their families. I think it probably doesn't hurt that I came of age, I was in graduate school during the Volcker recession of the early 1980s. And I think that was a searing experience for me and really made it stand out in my life.

• 5:57Stephen J. Dubner?

  Romer's parents were children during the Great Depression, and she saw the market made on them as they got older.

• 6:03Speaker 01

  My mother was the most frugal person you could imagine. I can remember when my father, they were buying a house that was a little bit of a stretch. And I can remember finding my father sitting up one night, just in a sweat over whether he should take on this mortgage.

• 6:21Stephen J. Dubner?

  If we were having this conversation at the start of 2020 with record-low unemployment, record-high stock markets, a generally robust economy, if we were having this conversation back then and I said, Professor Romer, I believe that real GDP in the US will fall something on the order of 5% to 6% in 2020, you would have said what to me?

• 6:44Speaker 01

  You're out of your mind. I can even remember having been on a phone call with one of the advisory boards that I'm on after the pandemic had started, but it was really early. And someone said, I think the unemployment rate's going to go to 11%. And even then, I said, oh, for heaven's sakes, this is not the Great Recession. It's going to be a dislocation. It's going to cause problems. But how do you get to 11%?

• 7:14Stephen J. Dubner?

  The unemployment rate actually blew past 11%. It is worth noting that an economist as experienced as Romer, as experienced in economic catastrophes, didn't see that coming. It's also worth noting that the magnitude and volatility of this labor implosion make it even harder than usual to measure the true unemployment rate.

• 7:33Speaker 01

  I mean, it always has, you know, some problems with it. There's some particular problems because we're asking questions that we don't normally have to ask, like, are you employed but staying home because you've been exposed to the coronavirus? Right? That's not a question that was ever on the survey before. And so there are certainly some problems just with how do we code those things?

• 7:58Stephen J. Dubner?

  How does this compare to her time in the White House during the Great Recession?

• 8:03Speaker 01

  You know, I thought in late November of 2008, wow, we're headed for a terrible downturn. Maybe the unemployment rate will go up three or four percentage points. And then the numbers start to come in and it's hitting you just, my heavens, how horrible this thing is. Both the private forecasters, those of us in government, everybody was having to readjust and say, wow, this is really bad. Oh, my goodness, it's worse than really bad. And I'm sure that the people in the Treasury and the Council of Economic Advisers today are having those same kinds of moments of, holy hell, I didn't know it could get this

• 8:48Speaker 01

  bad.

• 8:49Stephen J. Dubner?

  So I guess the big question really is how worried are you right now about the near and long-term future of the US economy?

• 8:59Speaker 01

  That's the million-dollar question. I'm, of course, deeply worried about the near-term outlook. I mean, what we're living through right now is truly wretched, and there aren't bad enough words to describe just how much many people are suffering. We've had a cataclysmic decline in output, a cataclysmic fall in employment.

• 9:28Speaker 01

  I think what worries me a lot is I think some people think, oh, we're starting to, you know, end the lockdowns will snap right back. And that unfortunately is not going to happen. And I think people maybe aren't prepared for the fact that this is going to be a long, hard slog. And so the pain we may have for not just a few more months, but a few more years is something that concerns me greatly.

• 10:00Stephen J. Dubner?

  There is growing evidence that this slog will indeed be long and hard. COVID-19 diagnoses are rising fast in many places. Many states, including Texas and Florida and California, have paused or reversed their plans to reopen the economy.

• 10:16Speaker 01

  This may cause a much more permanent change in how we live and how we do things. And so we have to shut down some industries and there's going to be some new industries that grow up. And then even for some of the same industries that we still want, the restaurants, the services, if those businesses have gone out of business, then somebody else has to come in, figure out how to do it, hire the workers, build the customer base, and that's going to take time.

• 10:49Stephen J. Dubner?

  So how does Romer compare the current US economic damage to the Great Depression?

• 10:54Speaker 01

  So we don't have quarterly data for the Great Depression, but the numbers for the first few years of the 1930s was real GDP fell at about 10% a year. And from the peak to the trough of the Great Depression, real GDP declined by about 30%. So we lost a third of our output. And when the numbers come out for the second quarter of this year, we're likely to learn that it's fallen by about 40% at an annual rate. So when we talk about a 40% annual rate, it means if we had the same behavior in the second quarter and in the next three quarters, GDP would be down 40%. And nobody expects that to happen.

• 11:38Speaker 01

  I was just looking at some numbers from the Congressional Budget Office, and they think when the dust is all settled, we'll probably say that GDP fell about 5 or 6% over all of 2020. So again, that's horrible, but

• 11:55Speaker 01

  When you compare it back to the Great Depression, where it was 10% a year and where it didn't happen just one year, but three years, it does at least, you know, help you to realize what our grandparents lived through back in the 1930s, dwarfs even what is truly a horrible time now.

• 12:16Stephen J. Dubner?

  As for the Great Recession, where Romer had a front row seat, real GDP fell then by about 6.3% in the fourth quarter of 2008. But apart from being a useful comparison, past recessions and depressions may also offer lessons on how to escape from this one. I asked Romer to describe what she considers the most effective parts of the Obama administration's Recovery Act.

• 12:41Speaker 01

  The first thing to say is we still had a quite severe recession. And so in that sense, nobody should take a victory lap because it was really painful for lots of people. I think the one piece of the Recovery Act that has been now studied in hindsight is the aid to state and local governments. For an economist, it's a great example because some of the state and local fiscal relief in the Recovery Act was actually given more based just kind of on historical accident.

• 13:17Stephen J. Dubner?

  Meaning the relief was almost randomized, as if in an experiment.

• 13:22Speaker 01

  And so it gave us a nice, natural experiment. We can see if states that got more fiscal relief for relatively exogenous reasons did better. And the answer was, they did. You know, it was only about $130 billion, $140 billion. I know, only. But it seemed to have been very effective.

• 13:44Stephen J. Dubner?

  For instance, one analysis of Recovery Act aid found that increasing a state's Medicaid funding helped increase long-term employment. On the flip side, states and municipalities that had drastic cuts were slower to recover, often by years. In Romer's own analysis of the Great Depression, she found that federal aid to states and municipalities was very effective.

• 14:08Speaker 01

  Absolutely. Before Roosevelt came in, the states were the main ones doing relief. And then as soon as Roosevelt started to have some of his public works and things like that, one of the things we see is states saying, oh, thank heavens. Now we can get our fiscal house in order. So as we were designing the Recovery Act, I was one of the big proponents of we got to make sure that state and local governments don't start laying off public workers and cutting a lot of the crucial services because that's just going to make this so much worse.

• 14:46Stephen J. Dubner?

  Romer thinks the same formula is important in the current crisis. State and local governments are experiencing huge drops in revenue and huge increases in spending for public services like healthcare and unemployment.

• 14:59Speaker 01

  State governments are something like $750 billion in the red.

• 15:05Stephen J. Dubner?

  And unlike the federal government, states can't just keep borrowing and run at a deficit. They have laws requiring at least the proposal of a balanced budget.

• 15:14Speaker 01

  And because they're not allowed to run budget deficits, they're going to have to start cutting spending, cutting social programs, cutting infrastructure. And that's going to be the real test of bipartisanship because Democrats tend to be proponents of giving money to state and local governments and Republicans often are not. And that will be the real test if we can get that through because it is the single biggest thing that needs to be done very quickly.

• 15:46Stephen J. Dubner?

  So if you are running one of these states that's taking on massive debt now, dealing with COVID, would you try to undo this balanced budget requirement and run it at a deficit?

• 15:56Speaker 01

  That's a great question. I think the much better thing is probably for states to stay the way they are and for the federal government to use its power to borrow to help the states. Simply because, right, we are one country and especially something like COVID doesn't affect every place the same, but it seems like the natural thing that we all share in those burdens. You don't say, oh, well, you're a state that happened to get unlucky, so you're just going to have to pay for it, right? A benefit of being in a large country is that we have insurance. We take care of one another. When there's

• 16:37Speaker 01

  a hurricane in Florida, the rest of the country helps them. When there is a terrible COVID outbreak in New York City, I think the rest of the country should help them.

• 16:48Stephen J. Dubner?

  Right. But the fact is that a lot of these states that are in real trouble, they claim that they're not getting anywhere near the federal money that they need. So relying on the old model may be catastrophic. So what do you think will happen there? Let me include the question that's a matter of some discussion and controversy about bankruptcy for states and whether it should perhaps be permitted.

• 17:14Speaker 01

  Just as, I think it's a terrible thing for anyone to talk about the federal government defaulting on its debt. I think we're a country where we pay our debt. So I think letting states go bankrupt, that's just not a sensible strategy. We ought to actually deal with the problems that we have. We're a rich country. We can do this and we don't have to act like a country that doesn't have effective government. What should be happening to a state that is in real trouble? I think it would certainly be much better for them to find a way to borrow than to not serve their people, to not deal with the

• 17:58Speaker 01

  public health crisis. So I hope it doesn't come to that. I hope that we can have sensible federal fiscal policy to help the states that are in real trouble. But barring that, finding a way to allow them to borrow, I think would be a much better strategy.

• 18:18Stephen J. Dubner?

  Keep in mind, Romer was among the most enthusiastic proponents of federal aid to states during the recovery from the Great Recession. While putting together the 2009 Recovery Act, one of the major debates was over the size of the federal stimulus package.

• 18:33Speaker 01

  I still feel we should have done even more, but I do feel good that I bargained people up by, you know, several hundred billion.

• 18:42Stephen J. Dubner?

  Yeah, so talk about that for a minute. We've read about your participation as a member of this team, which included, among others, Larry Summers, who's, I think, sometimes misunderstood in whether his aggression is intellectual or personal or whatnot. But you wanted the aid to be how much bigger than it ended up being? And how much more did you get than was originally proposed?

• 19:05Speaker 01

  The main thing that I remember actually was a meeting where Larry turned out to be a crucial second vote, for my opinion. So, you know, I think the proposals had been for numbers closer to doing a fiscal stimulus of about 600 billion. And I remember having run lots of numbers. I came in and I said, this is much too small. I think it needs to be, you know, at least 800 billion and probably bigger. And I almost fell off my seat when Larry said, I agree with Christie.

• 19:38Stephen J. Dubner?

  Why were you so surprised he agreed?

• 19:41Speaker 01

  Well, because Larry doesn't agree with anyone. But so it was really important for, you know, as I said, it's not nearly as big as it needed to be, but it was a lot bigger than anyone had been thinking.

• 19:54Stephen J. Dubner?

  Now, was your desire to have the fiscal stimulus be larger then, was that a result of your understanding of the Great Depression and the way that fiscal aid was used back then and that it essentially was not large enough?

• 20:08Speaker 01

  Absolutely. There's two things that I think I learned from the depression. One was relative to the size of the unemployment problem in the early 1930s, what Roosevelt did was much too small. It was big relative to anything that had been done in the past, but it was not nearly enough to deal with the problem. And the other thing is actually monetary policy can be very effective even when interest rates are quite low. And so, you know, though what the Federal Reserve was doing wasn't the bailiwick of the administration, one of the things that several of us tried to convey to the president is,

• 20:51Speaker 01

  you know, what the Fed is doing is a great thing. You want to be supporting Ben Bernanke.

• 20:57Stephen J. Dubner?

  What specifically was Bernanke doing that you thought was positive? That needed encouragement?

• 21:03Speaker 01

  Things like when interest rates get to zero. One of the tools that you still have is to try to affect people's expectations of inflation, because that affects what the real cost of borrowing is. And so I think Bernanke was taking a number of steps. For example, at this time, they started giving out something that's close to a target for what they were aiming for for the inflation rate. And I remember trying to explain that that was probably a good thing, because we were in a world where with unemployment at 10%, people might be starting to expect inflation to come down. And if the Fed is signaling, no, we're going to keep it at least at 2%,

• 21:48Speaker 01

  that can actually be very positive.

• 21:51Stephen J. Dubner?

  So the political costs of the recession and the Obama White House's response to it were pretty extreme, whether it was the recovery plan itself or just the depth of the recession. Dems got crushed in those midterms, two years after Obama's election. Surely, the Trump administration is looking back at that to judge how they want their responses to affect the next election. How do you think that will influence what they ultimately decide?

• 22:22Speaker 01

  I mean, I pray it doesn't affect what they decide. What everybody should be doing is what's right for the country. And so this is a case where you would think that both their political interest and what the country needs would be, you know, let's deal with the public health crisis. Let's make sure there's enough support for workers, that there's support for state and local government. So I'm hoping that this is a time when there's no conflict between the politics and what would be right to do. We'll have to see.

• 22:59Stephen J. Dubner?

  Coming up after the break, the mistakes learned from previous economic recoveries, and how even in a crisis, Romer keeps her chin up.

• 23:08Speaker 01

  You haven't yet taken the optimism out of me.

• 23:12Stephen J. Dubner?

  Also, don't forget to check out our new spinoff podcast, No Stupid Questions, which is sort of Freakonomics for psychology. You can get it wherever you get your podcasts.

• 23:23Stephen J. Dubner?

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• 24:00Stephen J. Dubner?

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• 24:47Stephen J. Dubner?

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• 25:24Stephen J. Dubner?

  Christina Romer, a former top White House economist, has spent her career analyzing the causes and consequences of recessions and depressions. In light of the fact that the economy has become much more globalized in recent decades, I asked Romer to describe how the US economy is unique and how that will affect our recovery from the COVID crash.

• 25:46Speaker 01

  Traditionally, the American economy has been, what do I want to say, more vibrant, more dynamic. So if you want to compare us to Europe, we have more flexible labor markets. It's easier to start a business here. It's easier to close down a business here. And that has often served us very well because capitalism is good at some things, and especially at figuring out what consumers want. But it does mean that it makes an economy much harder on workers. It's a lot easier to lay people off. You don't have the same employment protections.

• 26:29Speaker 01

  It certainly has been very hard on workers in this downturn, compared, say, to a lot of European countries where the governments have just been paying employers to keep people on the books. So one thing I could imagine is we've discussed that some industries may never come back, brick and mortar retail. It may come back some, but it'll never be like it was. And I think the positive would be that the US economy may be better at adjusting to such changes, that we are a dynamic economy. And so when there's an opportunity, American

• 27:10Speaker 01

  firms are pretty quick to step in. But if you're going to be a dynamic economy, you also need to think about how do you protect the people that may be harmed by all of that dynamism and don't move as easily from one industry to another. And we have to have a way to protect them and make sure that they're able to keep body and soul together and retrain for whatever new jobs are coming down the line.

• 27:41Stephen J. Dubner?

  I asked Romer to think back to the Great Recession and identify the mistakes that she and her fellow Obama economic advisers made, or at least the ideas that didn't work out so well.

• 27:52Speaker 01

  There are a couple. We had the making work pay tax credit. We thought rather than write people checks and have them arrive in their mailbox or in their account, we would just, you know, slip it in. So it's just going to show up in lower withholding. And we thought people would just notice they had more money in their bank account. And maybe that would have a good effect on spending. As it turned out, most people didn't seem to even know they got it. Or worse yet, they thought the Obama administration had raised their taxes, which they hadn't. We'd cut them by a lot. So that was one that just didn't work as we'd anticipated.

• 28:34Stephen J. Dubner?

  And was that a communication failure, a perception failure? How did that happen?

• 28:40Speaker 01

  I think some of it was a communication failure. I think some of it, it turns out, economic theory doesn't give us good insight. It's really, in some sense, a behavioral question. Do people respond more if they see the check in their hands? Or do they respond more if it just shows up in their paycheck a little bit every month? And I think it was partly we were just learning.

• 29:08Stephen J. Dubner?

  There was another idea that looked good but never gained traction.

• 29:12Speaker 01

  We were trying a lot, especially in 2010, to think of another fiscal stimulus that maybe would not be terribly expensive but could have a big bang for the buck. So we were very interested in a new hiring tax credit, a way to convince businesses to hire workers. And, you know, we really did due diligence on this one. We ran surveys and we spun the CPS tapes.

• 29:39Stephen J. Dubner?

  CPS stands for Current Population Survey.

• 29:42Speaker 01

  Just all the research we could think of, we were just desperate to get them over the hump and ready to hire again. We ended up getting a small kind of pilot program through Congress, but nothing on a big scale. So I'm not sure that we ever learned whether this wouldn't work, but that was a policy that I was very excited about. So maybe that's still something we could have in our arsenal and try at some point.

• 30:10Stephen J. Dubner?

  Romer also thought that more could be done around public employment, which she thinks played a big part in the US recovery from the Great Depression.

• 30:17Speaker 01

  Because, you know, what Roosevelt was able to do of putting just millions of people directly on the government payroll, I think, was incredibly valuable.

• 30:28Stephen J. Dubner?

  This is the WPA.

• 30:30Speaker 01

  WPA, the Civilian Conservation Corps. But in a modern world, trying to figure out how to hire millions of people quickly is something that seems...

• 30:44Speaker 01

  Really hard, and I think it's something President Obama would have liked to do. And we thought about it, we tried. I remember having a conversation with some other cabinet secretaries. I'd say, if money was no object, how many people could you hire? And they'd say, oh, lots, you know, 20, 30,000. Like, that's not going to do much when we've got millions and millions of people unemployed.

• 31:09Stephen J. Dubner?

  Why is it so hard? I mean, I realize you're talking about the federal government hiring people versus private firms, but you have been extolling the virtues of our nimble and robust capitalism, which can, you know, move fast, break things, hire and fire lots and lots of people. Why is it so hard for the federal government to do that?

• 31:29Speaker 01

  I think partly we have different standards for the federal government. So I think we try to do things probably more carefully. Think about the civilian conservation corps. So that's the hiring program from the depression that built a lot of the buildings in our national parks and things like that. It hired mainly young men. It took them out into the woods to build roads and log cabins. And it sent three quarters of their paychecks home to their mothers. And it was, by all accounts, incredibly successful. And, you know, I've met with some of these people that were on CCC projects. They're now in their 80s and 90s, and it was life transforming.

• 32:12Speaker 01

  But can you imagine proposing that today of let's, you know, hire young men, send them out to the woods and send their checks home to their parents? That just, I think, is not in the modern American way of doing things.

• 32:28Stephen J. Dubner?

  Right, but there are certainly modern equivalents. For instance, one problem with dispersing aid money has been that It needs a lot of manpower. One problem with contact tracing is it needs a lot of manpower. So is it really so hard to imagine a kind of massive shift from private to public hiring over the next couple of years? Because this is not going to go away. Unemployment is not going, I assume, back to 3%, 4%, 5% anytime at all soon, right?

• 32:58Speaker 01

  No, I agree. And so contact tracing is a great example. That is something that we ought to be able to use lots of people and put them to use very, very fruitfully. I think even if you were to think about reasonable numbers, I suspect that you're not going to be able to deal with the millions and millions of people that are currently unemployed. I'll give you another example of one of the ideas I was thinking about back in 2009 was, you know, how about just a massive program of hiring people to be teachers aides? And I was really very taken with this because so many of our public works jobs tend to be

• 33:42Speaker 01

  for, you know, construction workers, male, often oriented jobs. And I thought this was a great way to make sure that we were getting some balance and something that might be particularly good for female employment in a tough time. And we ran into a certain amount of opposition from, you know, think about local school districts that are laying off teachers and you say, but I have this great program. I'm going to give you all these teachers aides. You know, they tended to say, what we really need is the money. So we can keep our teachers employed. So it is hard to figure out what's the right way to do this. And I came away thinking, well, let's give more money to state and local government. So

• 34:27Speaker 01

  they're not laying off teachers and maybe they could hire the teachers aides.

• 34:31Stephen J. Dubner?

  Okay. So if you are running some kind of, you know, economic SWAT team right now, let's imagine you were running CEA now, or National Economic Council, or something to the equivalent. And you are trying to game plan the current recession or economic doldrums. Do you look more to the Great Recession as the model? Whether because it's more equivalent in some ways and/or just because it's more recent? Or do you look more toward the Great Depression? Where are you trying to draw your best inspiration from, both in terms of positive moves and mistakes to be avoided?

• 35:06Speaker 01

  I almost think we need to not look at either of them. In both those episodes or basically any other recession, the only problem is a lack of demand. And so just any policy you take gets demand up. This is so different because it's a public health crisis and you're not going to get demand up until you solve the public health crisis, nor do you want to because you don't want every business producing at full capacity because then you have more workers than you can actually keep safe. So I think we really need to throw away some of our previous experience and focus more on what's unique about a pandemic

• 35:51Speaker 01

  and how do we actually deal with the public health problem. So I think I would go much less, let's just get demand up. Let's just give people tax cuts and much more. Let's spend so that we solve the public health crisis. I'd maybe, you know, take inspiration from other countries today that have made more progress than we have rather than looking back at previous US recessions. We talked earlier about there's a dynamism to capitalism and especially a dynamism to the way Americans do things. But there is a cost, which is because we're laying off a lot of workers,

• 36:36Speaker 01

  the firm employee link is being broken and they're hard to get back. And it is hard to hire workers and get those right matches again. And so that's going to be costly and that may tend to slow us down in the recovery process.

• 36:56Stephen J. Dubner?

  There's also the issue, I've heard this from several employers, mostly small and medium sized firms, that even if they survived COVID pretty well, or are now returning to business, that they are having a really hard time rehiring their own former employees, because the unemployment insurance and the other aid that people have been getting is really great. And they can literally earn as much, if not more, by not going to work. I know this was an early concern when the CARES Act was being put together. It was largely dismissed as saying, hey, it's much better to support individuals. If this is the downside, we'll live with it. But now, there are employers who are living with it. What are your thoughts on that?

• 37:40Speaker 01

  I think absolutely, in the initial stages, it was great to get more money into the hands of people who were struggling. And we do, as a country, have a terrible inequality problem. So giving $600 more a week in benefits to a low wage worker, that really was a great thing to do. I think as the economy recovers, and you want people to go back to work, you don't want them to just lose those funds, you know, to be worse off if they go back to work. So can you give us some benefits? People have been talking about, you know, reemployment bonuses, or things like that. I think it also comes

• 38:25Speaker 01

  back to, you know, we've got a long run inequality problem. We should be dealing with that. At some point, you don't want to be doing it through your unemployment system. You want to be doing it in a more sensible way, through your tax system, or the earned income tax credit, or, you know, better benefits in the form of universal health insurance, things like that.

• 38:54Stephen J. Dubner?

  So one early and much cited paper of yours was about fiscal policy. And you argued that fiscal policy during the depression didn't help the recovery all that much. And that finding of yours has been interpreted over the years as an argument against fiscal intervention, which, as I read your work, was not at all what you intended. So can you quickly summarize your actual finding and then describe the misinterpretation, then we'll take it from there?

• 39:20Speaker 01

  So the actual finding is if you look at what it was that helped the economy to recover from the Great Depression, the monetary actions that Roosevelt took when he came in were much more important. That didn't have anything to do with whether fiscal policy could have been valuable. It was just the fact that we didn't do all that much fiscal stimulus in the mid 1930s. And so it was not the main driver of the recovery. Much of my subsequent work, and all of it joint with my favorite co-author and also husband, David Romer, has actually been pointing out that fiscal policy is very effective.

• 40:05Speaker 01

  So we have a paper looking at the effects of tax changes. And if you cut people's taxes, it does help to stimulate the economy in the short run. It helps you to increase demand and get an increase in output. We've looked at the effect of transfer payments, and that too has a substantial positive effect on consumption. So I think we've done some very important work saying that fiscal policy is really valuable. It just turned out it was not used in a nearly aggressive enough way in the depression to have been a big factor accounting for that recovery.

• 40:43Stephen J. Dubner?

  Although Roosevelt must have felt that he was using a lot of fiscal stimulus, yes, it seemed like a lot at the time relative to what had been done in the past?

• 40:52Speaker 01

  Oh, of course, right. And it was even a lot in an absolute amount in the sense that the actions taken by the federal government were pretty substantial. But if you look at the total fiscal situation for the US, because state and local governments were going in the opposite direction of hunkering down, of actually raising taxes, cutting spending, the net fiscal stimulus was pretty small because the states counteracted anything Roosevelt was doing on the positive side.

• 41:29Stephen J. Dubner?

  We should also say, this is tangential, but I can't let it pass without saying that among your husband's most noteworthy research has to do not with depressions, recessions, but with fourth down decisions in football.

• 41:42Speaker 01

  True. He calls that one his midlife crisis paper. Even he would tell you his most important work is on monetary and fiscal policy and financial crises.

• 41:52Stephen J. Dubner?

  But I gather that Bill Belichick read the paper and integrated it into his philosophy, yes?

• 41:58Speaker 01

  I believe he did read the paper, but you'd have to talk to David about whether he listened to it enough.

• 42:06Stephen J. Dubner?

  Obviously, it is tangential to our conversation. And yeah, in some way, it's not, which is that it was an empirical finding which argued that using the tools of economic analysis, you can determine that almost all football coaches are playing fourth down wrong and that they should punt much, much, much, much less than they do. And yet, it's been mostly ignored by all but maybe a handful of coaches. Do you see equivalent empirical research done in the realm of fiscal or monetary policy that is demonstrably correct, or at least worth considering among the tribe of economists, but is largely ignored by practitioners?

• 42:44Speaker 01

  One of the things that's been nice is that in a lot of macro research, it actually has been the opposite of ignored, that policymakers have listened. So I think especially central bankers have been very interested in academic research on the effectiveness of quantitative easing, or the impact of monetary policy, or credit, things like that. So I think on the monetary side, there is a lot of interest in research and learning from the research. On the fiscal side, it's been a mixed bag. I feel there's a lot of professional research that fiscal policy can be very effective.

• 43:26Speaker 01

  When I was in the Obama administration, or certainly later in the Obama administration, when we desperately needed more fiscal stimulus, that was the moment when policymakers, especially Republican policymakers, decided that no, fiscal policy didn't do anything. But then, part of what's happened over the last 10 years is there's just been paper after paper, looking at what was done in the Recovery Act, looking at what was done across countries in terms of their fiscal response to the Great Recession. And those, again, almost uniformly find that fiscal policy is very effective. So I've taken a little bit of relief that facing this crisis, Congress said, yeah, I guess we'll do it again.

• 44:10Speaker 01

  In fact, we'll do even more. So maybe policymakers are in fact listening and realize that these things do help.

• 44:18Stephen J. Dubner?

  I have to say, when I first started paying attention to economics years ago, it was one of the things that most dispirited me, because I found that the greatest economists of the era were still debating the degree to which fiscal policy during the Depression either helped end the Depression, or, on the other hand, exacerbated it. And I thought, well, wait, if these people can't tell us the answer to that question, perhaps you're not very useful to us. I don't mean to indict your whole tribe, but you're saying that you feel there has been more consensus, at least on that kind of macro policy intervention, in the last 10 or so years?

• 45:00Speaker 01

  I do. I think if you look, say, at the University of Chicago's, their panel of experts, if you say, what did the Recovery Act do, some very large fraction will say it absolutely was helpful.

• 45:14Stephen J. Dubner?

  We should say that's a survey that U of C runs. It's not all University of Chicago economists.

• 45:19Speaker 01

  No, no, no. It's actually a very wide range of economists. So I think everyone wants to say, oh, economists, I'll disagree. I think you can always find somebody to take the other side, but it's often the case that 90% of economists believe one thing and 10% believe the other. And so the vast majority would say monetary policy is very important. A vast majority would say if you cut people's taxes, that will indeed stimulate the economy in the short run.

• 45:51Stephen J. Dubner?

  Okay, so let's, in our remaining time, look at the future as best we can. It's obviously unpredictable. I'm curious, when you look at the policy that you see being considered and being made now, fiscal and monetary policy, and if you try to play it out in your mind, not just a few months from now, but a few years, maybe many years from now, I'm especially curious if you think there are any lessons from the depression in particular that we should be taking, especially when the cure turns out to be, you know, as dangerous as the ailment itself. So one example I think about, this is not a perfect parallel,

• 46:30Stephen J. Dubner?

  but after the war, when there were wage controls and health insurance began to be offered as a fringe benefit and bundled with employment, which is something that most health economists say is one of the really difficult things about our healthcare system now. When you look at the policies being considered or made now, what you think we should watch out for? What might be some sad or difficult downstream effects?

• 46:57Speaker 01

  The one that worries me is the budget deficit. So not in the immediate term, but if you think about, you know, how much money we're spending, it's completely appropriate. We need to be doing it, but we are better at running budget deficits than we are at dealing with them when the crisis has passed. And so if we keep dealing with crises, but then not getting our fiscal house in order afterwards, at some point, we're not even going to be able to deal with the crises because we will have run our debt to GDP ratio up so high.

• 47:36Speaker 01

  We should have a plan to raise taxes eventually to get back in a more sustainable system. I think the pandemic may well exacerbate inequality, and that was already a terrible problem. So I think we need to be getting through this, but also thinking about what do we do when we're through all this to make sure that we're sharing the benefits of this amazing economy much more broadly, much more fairly.

• 48:11Stephen J. Dubner?

  I do feel compelled to point out that it's a little disorienting to speak to you, a Democratic or Democratic associate, at least economist, who is urging against, you know, a certain level of deficit spending because we're used to Republicans saying that, especially recently Fed Chair Jerome Powell, he pledged to use what he called the Fed's full range of tools to support the economy. And he also urged policymakers to not worry so much about raising debt and instead to use what he called the great fiscal power of the United States to get through this with as little damage to the longer run productive capacity of the economy as possible. So is this just a matter of the Republicans are in office now and you respond to the

• 48:56Stephen J. Dubner?

  crisis in front of you? Or has there been some kind of switching of direction for Democrats and Republicans or economists to support them when it comes to deficit spending?

• 49:09Speaker 01

  I want to be clear, I am wildly in favor of doing the deficit spending that we're doing now. We need to do this. I agree completely with Chair Powell that we should be doing anything we need to do to get the economy through this crisis. But that doesn't mean that you don't think about the deficit. Even in 2010, we're not about to try to deal with the deficit right then, but we were talking about it because you need a plan for three years, five years from now, how do we deal with this?

• 49:50Speaker 01

  And perhaps because I believe so firmly that fiscal stimulus is a crucially valuable tool, I want to make sure it's there the next time we face something like this. And so I think I've been very aware of the need to, when you make it through a hard time and you're back in the good times, that's when you repair the roof on your house.

• 50:15Stephen J. Dubner?

  Right. So are we all going to come out of this okay, do you think?

• 50:21Speaker 01

  I hope so. I mean, there are going to be some workers whose jobs disappear forever. We're not just going to go back to the way we were. So I think we could all come out of this okay, provided we take the policy actions that we need, we invest in the training to make sure everybody's okay. I worry that we'll get through the worst of it and then we'll forget about some of the people that have been hurt and that remain struggling.

• 50:57Stephen J. Dubner?

  And let's say that some of the changes that have happened thus far to travel, to live entertainment, to restaurants, basically all of them wiped down, you know, close to zero. Let's say that for a variety of reasons, they sort of stick and that people don't return to them in large numbers at least. Do you feel that the US economy and our brand of capitalism is still? Set up to be as vibrant and nimble to adjust and for people to job reallocate? Or do you worry that a lot of people in those industries, which employ millions and millions and millions of people, that they will essentially be adrift, perhaps for a long time, unable to reallocate into commensurate jobs?

• 51:40Speaker 01

  I think many of them will be able to reallocate. Again, I have a lot of faith in workers and in their ability to develop new skills and find jobs when they're available. I think they'll need a helping hand. They'll need support in the period in which they are trying to learn a new skill. It also is going to be a lot easier for a 25 or a 30 year old worker than it's going to be for a 55 or a 60 year old worker.

• 52:14Stephen J. Dubner?

  I sometimes think that this moment is, you know, that if you were looking at this from the future, like an archaeologist looking at sediment, like the meteor that wiped out the dinosaurs ultimately, that this is going to have a huge scarring effect on the world. And maybe I'm totally wrong, but my sense is that this disruption has already led just about everybody to question the way they live their life, the way they earn their living, the way they interact with their families, the rest of society, community, and so on. When you look down the road, do you think the world is fundamentally different? And if so, on what levels?

• 52:57Stephen J. Dubner?

  Or do you think I'm maybe being way melodramatic here?

• 53:00Speaker 01

  I'm perhaps not quite as dramatic as you, but I agree that this may set off a sea change. I think you're right that we will probably trade less, travel less, work differently. Whether it is a giant shift or just a moderate shift, I'm less sure. But I think it is going to change things. And I think the real question is, How well we manage this? Do we manage it so that it changes things, but we're all still OK?

• 53:40Speaker 01

  Or did it change things and make some of our underlying problems even worse? But I guess, you know, you haven't yet taken the optimism out of me. I still am hopeful that we can recover. I mean, the history of this country is rising to challenges, and I desperately hope that we do it again.

• 54:09Stephen J. Dubner?

  Coming up next time, a topic that didn't come up in today's conversation with Christina Romer, but maybe should have. One of the most persistent economic problems in American history.

• 54:21Speaker 06

  The racial wealth gap is such that the typical black family has about 10 cents on the dollar as a typical white family.

• 54:30Stephen J. Dubner?

  So are reparations the answer? We'll hear the arguments in favor.

• 54:35Speaker 06

  The material redress would, in a retrospective way, bring about justice by affecting the racial wealth gap that we see today.

• 54:46Stephen J. Dubner?

  And the arguments against?

• 54:48Speaker 07

  I think you're playing with words and avoiding the hard work of trying to discover complex historical causal chains.

• 54:57Stephen J. Dubner?

  Also, several other ideas to address black-white wealth inequality. That's next time on Freakonomics Radio.

• 55:07Stephen J. Dubner?

  Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Daphne Chen. Our staff also includes Alison Kreglo, Greg Rippon, Matt Hickey, Zach Lepinski, Mary De Duke, and Corinne Wallace. Our intern is Emma Terrell. We had help this week from James Foster. Our theme song is "Mr. Fortune" by The Hitchhikers. All the other music was composed by Luis Guerra. You can get Freakonomics Radio on any podcast app. If you want the entire back catalog, use the Stitcher app or go to Freakonomics.com, where we also publish transcripts and show notes. As always, thanks for listening. Yep. So the political cost, is that your dog or mine?

• 55:47Speaker 01

  I think it's yours.

• 55:48Stephen J. Dubner?

  Do you have a dog?

• 55:49Speaker 01

  I do not have a dog.

• 55:51Stephen J. Dubner?

  OK, sorry.

• 56:01Stephen J. Dubner?

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• 56:34Stephen J. Dubner?

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