"The fact that she's done fundamental work on US economy in the 1930s I think is solid qualification, and a really good signal from the point of view of putting the economic team together," said Barry Eichengreen, who has taught with Romer at Berkeley for 20 years. "I feel comfortable knowing that Christina's going to be there." [bold added]This certainly makes sense, until we find out what her fundamental ideas consist of. Unfortunately, despite commentators describing her as "pragmatic" and "not doctrinnaire," which they mistakenly view as equating to being rational and principled, Romer has come to precisely the wrong conclusions about the Great Depression:
In 2006, she wrote an article with Hsieh for the Journal of Economic History arguing that the US government's inadequate response during the Depression was a "policy mistake of monumental proportions."While she may have "shown flexibility in thinking and a willingness to follow data wherever they lead," her fundamentally flawed core ideology inevitably leads her to the wrong conclusions.
The lesson she drew from that crisis, according to colleagues and a review of her writings, is that strong government intervention is sometimes necessary medicine. That may mean she will urge Obama to act aggressively to keep capital flowing through the financial system and to enact an economic stimulus package that injects government spending into the economy at the risk of ballooning the deficit.
"She'll be weighing in on the side of a large stimulus," said J. Bradford DeLong, a fellow Berkeley economist. [bold added]
For an alternate view, let's look at a description of what Henry Hazlitt had to say about the causes and lessons of the Great Depression. From "Hazlitt and the Great Depression" by Jeffrey Tucker (1993):
There was no visible free-market theory on why the U.S. was in crisis. But Hazlitt knew from his reading of history of the trouble that comes with an overactive and indebted government. He knew the secret to the crash resided with these problems.Tucker, in describing a debate in the pages of The Nation (of which Hazlitt was then the literary editor) between Hazlitt and a prominent Marxist named Louis Fischer in 1933, goes on to relate the following:
A stable market order, he said, requires an atmosphere free of shocks, or at least a government that allows the economy to correct once those shocks had occurred. The war had artificially inflated the prices of commodities and they needed to correct downward to a more realistic level. He argued the crisis of 1929 was that downward correction.
"But the focus of this collapse," he wrote, "was aggravated enormously by the whole series of post-war policies." Among these he listed the "vicious Treaty of Versailles," the "disorganization caused by reparations and war debts," the "preposterous tariff barriers thrown up everywhere," the abandonment of the gold standard and the adoption of the "gold-exchange standard," and "reckless lending to foreign countries.
Most importantly, he blamed the "artificial cheap-money policy pursued both in England and America, leading here to a colossal real-estate and stock-market speculation under the benign encouragement of Messrs. Coolidge and Mellon." This malinvestment, caused by inflationary policies, created distortions in the capital stock which called for correction. [bold added]
One such patently absurd recommendation in Fischer's essay, according to Hazlitt, was his call for high new taxes on capital. This measure "would violently aggravate the catastrophe," Hazlitt said, by causing business to take another downturn that would make the 1929 crash look trivial. An increase in wages would be undesirable as well, Hazlitt said, because that would cause their cost to business to increase and lead to even more unemployment. In order to make the economy recover, he said, we need more private capital, not less, and that means letting markets work.Hazlitt was not long for his job at that publication, Tucker says. With disturbing foresight...
More than anything, said Hazlitt, we don't need socialism, communism, or "that ambiguous thing called Planning." [bold added]
Indeed, it was the next issue in which The Nation announced its devotion to the socialist cause. "Mr. Roosevelt is attempting to preserve capitalism," said the editorial, echoing conventional wisdom of the day, "to save it from itself by robbing it temporarily of several of its most fundamentally capitalistic prerogatives."Since then, the country's steps have been heading toward a "socialized industrial society", but perhaps more like a drunkard than "deliberate." With the appointment of Romer, it appears that we should prepare for a more sober and purposeful march toward their "integrated, socialized" ideal society.
If the New Deal passes, said the editors with rare insight, "he will have the power to tell industry what and how much it may produce, what it may charge for its products, how much it shall pay to labor, what hours labor shall work."
But this was not enough for The Nation. "We tend to agree" with Fischer, said the editors, "that a collective society offers the best hope for this desirable end." They favored a "move toward collectivism" as rapidly as possible. Criticizing Roosevelt's alleged timidity, they said the "country's steps toward an integrated, socialized industrial society should be deliberate and purposeful." [bold added]