Opinion, Berkeley Blogs

"Not her father's recession"

By Brad DeLong

No sooner did I write my post, triggered by Class of 1957-Garff B. Wilson Professor of Economics Christina Romer's imminent return to Berkeley from her stint serving as cabinet-rank chair of President Barack Obama’s Council of Economic Advisers, about her Brookings Institution speech of March 9, 2009 than something more interesting from her crossed my desk--the text of her final speech as a cabinet-rank member of the Obama administration, at the National Press Club on September 1, 2010:

Class of 1957-Garff B. Wilson Professor of Economics Christina D. Romer:

The first recession I really remember was that in 1981-82. I began graduate school just as the economy peaked. Over the next year and a half, output plummeted and unemployment rose dramatically. That recession was personal. My father lost his job at a chemical plant in the spring of 1983, shortly after the trough of the recession. I vividly remember the phone call where he told me that he had “been sacked.” He was careful to say that I shouldn’t worry about my wedding, which was scheduled for that summer -- there was money put aside for that. Just before the wedding, my mother learned that her teaching job was also uncertain for the next year. David and I nevertheless got married as planned -- and the wedding was all the more special because my mother and her two sisters did much of it themselves.

I remember the tremendous sense of relief when I returned from my honeymoon to hear that my mother’s school district had found the money to continue her position. Soon after, my father found a less well-paying but very stable job. By Christmas, our family’s economic health was almost fully restored.

1981-82 was a terrible recession, but it was a recession economists understood. Like many other postwar recessions, it was started by the difficult decision by monetary policymakers to raise interest rates to bring inflation down. The suffering of ordinary families like my own was real and costly. But once inflation had been reduced and the Federal Reserve lowered interest rates, construction spending, purchases of durable goods, and business investment came surging back. Unemployment, which peaked at 10.8 percent at the end of 1982, fell to 8 percent by early 1984.

The current recession has been fundamentally different from other postwar recessions. This is not my father’s recession. Rather than being caused by deliberate monetary policy actions, it began with interest rates at low levels. It is a recession born of regulatory failures and unsound practices that contributed to a housing bubble and eventually a full-fledged financial crisis. Precisely what has made it so terrifying and so difficult to cure is that we have been in largely uncharted territory. An all-out financial meltdown in the world’s largest economy and the center of the world’s financial system is something the world has experienced only once in the past century -- in the 1930s. Thus, the President took office in the midst of a recession of historic proportions, but for which history provided little guidance...