Berkeley Couple Tackle Top Fiscal Issues of the Day

By Kate Rix

At a time when there is enormous need for experts in fiscal policy and monetary policy, it would be hard to do better than Professors Christina Romer and David Romer.

Christina and David Romer. Photo by Peter TenzerThe husband-and-wife team has studied the history of U.S. monetary policy from the Great Depression to today, looking at why it has sometimes gone wrong—as in the 1970s, when it produced a decade of high inflation—and sometimes gone right—as in both the 1950s and the 1990s, when inflation was low and the economy stable. They have also studied whether tax cuts can provide stimulus to a depressed economy, a timely topic if there ever was one.

In addition to doing research, Romer and Romer have consulted with Barack Obama’s presidential campaign. They also hold two seats on the committee that decides when the U.S is officially in a recession. In spite of plummeting global stock markets and the U.S. bailout, that committee has made no recent declaration.

“Quite often the recession is over before we say that we’re in one,” says Christina Romer, seated in a small sunny conference room near the pair’s offices in Evans Hall.

“We don’t do forecasting, or even try to figure out exactly where the economy is right now,” continues David. “We’re the dater of record.”

It is typical of this highly collaborative couple for one to pick up on a point made by the other. They joined Berkeley’s Economics Department in 1989 as junior faculty. Since then they have both received endowed chairs: Christina is the Class of 1957 Professor of Economics; David, the Herman Royer Professor in Political Economy.

“Most schools are nervous about having a married couple in the same department,” says David. “What was so refreshing about Berkeley is it was never an issue. Because they didn’t have issues, we were able to sit next door to each other.”

They are macroeconomists, working together on big questions. One line of their recent research looks at the ways that tax cuts affect both the economy and the government budget. They started by poring over 5,000 pages of documents in order to eliminate tax changes that were in fact responses to other developments directly affecting the economy and the budget. The inclusion of such changes had confounded previous research efforts in the area. Then they looked at how cutting taxes has historically stimulated, or flattened, the economic picture, and at whether — as many economists and politicians have asserted — cutting taxes is an effective way for advocates of lower government spending to achieve their goals.

What they found about both issues surprised them. Tax cuts provide powerful short-run stimulus to the economy, but there is little evidence that tax cuts restrain government spending.

“It turns out,” Christina explains, “that tax cuts have led, eventually, to tax increases. Basically, something has to give. What we thought gave when you cut taxes was spending, but we seem to find that in postwar U.S. history what actually gives is the tax cut itself. A substantial fraction of a tax cut is typically undone in the subsequent five years.”

At the moment, Romer and Romer are involved in research of American fiscal policy between World Wars I and II.

“In the 1920s the idea of cutting taxes without cutting spending was out of the question,” says Christina. “Most people paid no tax at all, yet the top tax rates were higher than today. Because tax rates on the rich were so high and changed so much, this seems like a great environment for testing whether high marginal tax rates have big incentive effects.”

The Romers say that their research and analyses are stronger because they work together. They started out working in different areas of economics. Today, their research interests are very similar. They write papers together, sometimes with one taking the first pass at a draft of a section and the other weighing in on the second round. Sometimes when all is done they can’t tell who wrote what.

“There are other very close teams that don’t happen to be married. Maybe it’s easier for us because we share a house and ride in together,” says Christina. “What’s nice is you can be brutally frank with one another.”

“We tend to end up putting more work into every project,” adds David, “but we get the benefits in terms of feedback from one another.”

What Romer and Romer encountered in Obama was a candidate whose desire for rigor matched their own. One of the first things they were asked to do was help craft talking points for a speech about the economy. Their first draft was sent back, with a pleasant surprise.

“We were told that he wanted something more researched and better documented. Of course we sent back more material. With footnotes,” David recalls with a laugh. “What’s good about Senator Obama is that he wants a lot of points of view. He’s really serious about getting good advice.”

 

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| Updated: May 29, 2009