As of now, I am in control here, in the White House

Why Christina Romer Might Have Resigned

When White House Council of Economic Advisers Chair Christina Romer announced last week that she was leaving in September, she offered that she wanted to spend more time with her family, an excuse so common and disbelieved it’s become a magnet for jeers and yawns.

There is some evidence that this case should be no exception. Romer is known to have butted heads with White House National Economic Council Director Larry Summers, who butts heads with lots of people he meets owing to an abrasive personality.

And as a former Treasury Secretary presumably viewed the White House as his new fiefdom. But a move she made this spring might have given him the ammo to oust her, or at least made the notion of  her remaining with the administration an untenable proposition even to her.

Apparently forgetting that she had come down from the Ivory Tower to do wage war on the land-mine strewn political battlefield of Washington, Romer allowed to be published in June a paper she coauthored with her husband arguing that tax increases have strong, adverse effects on GDP and investment.

Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.

The most striking finding of this exercise is that tax increases have a large negative effect on investment.

This, is of course, while the rest of the Obama administration is arguing that we need to increase taxes – that is, allow the Bush tax cuts for the wealthy to expire.

In what appeared to be a move to defend herself, Romer wrote on the official White House “blog” July 28 that the tax cuts on the rich should be allowed to rise, even going so far to try to explain that her paper didn’t contradict this.

The view that tax cuts focused on the middle class can be important to the recovery is consistent with a wide range of research, including a paper that I wrote with David Romer before coming to government and that was recently published.  This paper showed that tax changes in the postwar United States had larger short-run impacts on output growth than previously believed.  Since most postwar tax changes have been broad-based, our evidence indicates that broad-based tax cuts have large effects.  But it’s important to note that our study did not distinguish among tax cuts for different groups and did not focus on high-income earners.  Thus, it provides no basis for doubting the compelling evidence that tax cuts for high-income earners are less effective than broad-based tax cuts focused on the middle class.

Well, the study  says that tax increases motivated by a “long-run goal such as higher normal growth or increased fairness” have the largest effect, though it also says tax changes to reduce the deficit do not seem to have much effect. The Obama tax increases are partially being sold as a matter of “fairness” to the middle class, partially to reduce the deficit. But any tax increase that focuses on a single economic group would probably fall into the “fairness” category.

Romer seems to try to exclude the Obama tax increase by saying her study didn’t focus on high income earners. But it probably didn’t focus on lots of different groups, and the overall message that tax increases harms growth is clear.

And in Washington, her words will put her on the defensive. Whatever the caveats, she walks around with the phrase “tax increase of one percent of GDP lowers real GDP by almost three percent” tatooed on her forehead.

In fact, House Minority Leader John Boehner has already picked up on the gaffe, plastering the following charage onto his website.

President Obama’s chief economic adviser, Dr. Christina Romer, finds herself at the center of the debate over President Obama’s job-killing small business tax hike – and on the opposite side of her boss.   In an academic paper published in last month’s American Economic Review – a time period during which the administration was undoubtedly coalescing around its support for job-killing tax hikes – Dr. Romer writes that “tax increases appear to have a very large, sustained, and highly negative impact on output” while “tax cuts have very large and persistent positive output effects.”

Romer, rosy cheeked and smiling with irresistible cheer,  has been the queen of economic happy talk on TV as the Obama recovery has soured. Unfortunately, the chilling thought that the public might believe she agrees with Republicans on tax cuts might have taken her out of the White House PR mix and sent her back up the Ivory Tower.

4 Responses to Why Christina Romer Might Have Resigned

  1. Yeah–kids in my experience get “museum foot,” a dragging extremity accompanied by plaintive whines, pretty early in the game. As for Romer,
    bingo–also the stylist shortage.