Christina Romer's Departure Economic Policy The departure of Christina Romer (pictured) as chair of President Obama's Council of Economic Advisers ought to prompt a rethink of U.S. economic policy -- but it probably won't, even though Friday's jobs numbers showed that the economy is not doing enough to create jobs for the 8.4 million people thrown out of work since the Great Recession began in December 2007.

The administration's economic policy has centered on the idea that government stimulus will get the nation's economic heartbeat going again. But consumers and corporations are on a spending strike, and the government needs to give them a compelling reason to spend. Larry Summers is still in place as director of the White House National Economic Council, and unless he pushes for policies that spur corporate investment, job growth could continue to stagnate.

Tepid Job Growth Keeps Great Recession From Ending

Political tea-leaf readers are suggesting that Romer was forced out of her position -- taking the blame for a forecast that the jobless rate wouldn't exceed 8% thanks to the $862 billion stimulus program. That forecast proved to be far too optimistic, with the jobless rate peaking at 10.2% last October. And Summers, her rival for economic adviser supremacy, is being blamed for her ouster.

In reality, Summers' leadership is the driving force behind a policy that isn't working: Expectations for Friday's July jobs numbers were not rosy, and the actual outcome was mixed. Economists expected a loss of 65,000 non-farm payroll jobs, a rise in the unemployment rate from 9.5% to 9.6% and a gain of 90,000 jobs in the private sector. Instead, 66,000 more jobs were lost in July than expected and private sector jobs came in 19,000 short of forecast. But the unemployment rate remained at 9.5%.

With this kind of jobs performance, it's tough to suggest that the recession has ended. Economists estimate the economy would need to add 200,000 jobs a month to whittle down the ranks of the unemployed. And those who claim that we could be in for a double-dip recession are missing a key point -- the officials who marked the beginning of the "first" recession, the National Bureau of Economic Research, haven't yet said that it has ended.

Stimulus Alone Will Not Create Enough Jobs

The problem with the economic policy for which Romer is taking the fall is that it's based on the assumption that all the economy needs is a bit of pump-priming from the government to get the private sector to kick in and invest in creating jobs. This is based on a partially sound theory that when the private sector shuts down, the economy will collapse unless the only capital source left standing -- the government -- spends to get things moving.

As an MIT-educated former finance professor arguing the Keynesian view emailed me, "Consumers won't spend when they are fearful of their jobs and they are trying to rebuild their personal balance sheet. Corporations won't spend (their $1.8 trillion) if they don't expect consumers (and/or government) to buy. The spender/investor of last resort is government but it can't spend if Congress keeps saying NO, if Congress limits how much can be borrowed by the government, and if the public is (incorrectly) more fearful of the deficits than of unemployment (of others)."

How to Get Companies to Open Their Wallets

The problem with this theory about government stimulus is the assumption that it will inevitably lead to private sector spending. But that doesn't seem to be happening: Though American corporations have $1.84 trillion in cash on their balance sheets, they aren't opening their checkbooks to finance growth. What's lacking, in my view, is an economic mechanism to spark private investment.

To create that, Summers ought to propose incentives for businesses to spend that $1.84 trillion on productivity-enhancing technology, which would create jobs for people designing, building, and servicing that technology. Unfortunately, I don't know what that new technology would be, so I'm stymied. However, recent technology sector earnings reports suggest that corporations are finally spending again to replace aging computer equipment after five years of holding back.

This is not to say that I think government spending isn't needed: In fact, I think the current stimulus package is too small, but the White House is afraid to ask for more due to its perception that such stimulus would increase the deficit -- handing Republicans what the White House perceives as a powerful political issue that could work against the Democratic Congress this November.

The Obama administration should supplement its stimulus strategy with incentives for corporate investment. But I'm a bit concerned that Romer's departure will not signal such a change in policy.

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