Christina Romer "Cringes" at Talk of Ending Stimulus, Fears 1937 Redux

Christina Romer, chair of the President's Council of Economic Advisers, has little patience for such chatter.

"I frankly cringe every time I hear anyone say, ‘gee, maybe we should just cancel the second half'" of the $787 billion package passed last February, Romer says. "All the good forecasts we're seeing about GDP growth, about the recession ending are predicated on the kind of stimulus that's providing. It's so important, obviously, that that continues."

As an economic historian, Romer is similarly steadfast in her view that those calling for the Fed to end its special programs and ultra-easy monetary policy risk repeating the mistakes of 1937. From 1933-1936, loose monetary policy helped the economy recover sharply from the depths of the Great Depression. But the Fed's decision in 1937 to raise reserve requirements "turned out to be part of a disaster" and the economy fell back into severe contraction, Romer says. "It's a cautionary tale."

Those calling for "exit strategies" are confusing the fact that the economy has apparently turned a corner with one that's back to normal, Romer says. "It's so important to realize, an unemployment rate at 9.8% is far from normal [and] we don't expect it will drop from 9.8% right down to more normal levels instantaneously. We'll have plenty of notice when it's time to start pulling back."

By the same token, the President's chief economist says it's premature to worry about inflation.

"We're nowhere close" to the economy overheating, Romer says "We'll have plenty of notice before we're likely to have a genuine problem with inflation."

With National Economic Council Director Lawrence Summers singing a similar tune this week, the message from the White House on stimulus is clear: Steady and she goes...full steam ahead.