Romer’s Research: Expiration of Bush Tax Cuts Will Be Highly Contractionary

Christina Romer, Chair of the President’s Council of Economic Advisers and economics professor at the University of California at Berkeley, has published an article (co-authored with David Romer) in the June 2010 issue of the American Economic Review titled “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.”  Unlike her statements in her role as an Obama adviser, this article is serious academic research, published in what is generally recognized as the world’s leading academic economics journal.

In the article, the Romers divide legislated tax changes into those undertaken in response to economic conditions and those that are “exogenous,” by which they mean changes made for other reasons.  The expiration of the Bush tax cuts clearly falls into the “exogenous” category, because it is the result of legislation passed years ago, before anybody could have anticipated the economic conditions under which they would expire.

What the Romers found is that exogenous tax increases, such as will occur with the expiration of the Bush tax cuts, “… are highly contractionary.  The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.”

Here is a strong argument, based on solid academic research, for extending the Bush tax cuts, and not letting them expire, made by one of President Obama’s top economic advisers.  It will be interesting to see to what extent the insights of Christina Romer, economics professor, have an impact on what that same Christina Romer, adviser to the president, has to say in public about the impending tax rate increases.

Romer, the economics professor, says raising rates now will be “highly contractionary.”  Will Romer, the president’s adviser, speak up and tell the public that letting the Bush tax cuts expire will hamper the recovery?  Or will she toe the party line and not tell Americans the public policy implications of  her own academic research?

Another interesting sidelight here is that the opening footnote in the article says it was written with financial support from the National Science Foundation.  Here is a big opportunity for NSF-funded research to have a direct policy impact, because (1) the research has direct policy relevance to current economic conditions, and (2) because it was undertaken by somebody who actually has policy influence.

We shall see if that opportunity for an impact actually results in any policy impact.  My guess is, it won’t, and that any policy statements Romer makes on the subject will be based more on politics than on her knowledge of economics.