In the wake of the “Great Recession” and all the economic, financial, and structural changes it brought, a “better new normal” must be reached by economic policy makers, said Christina Romer at the 2010 Princeton Colloquium on Public and International Affairs hosted by the Woodrow Wilson School.

Romer, Chair of the Council of Economic Advisors, gave the opening keynote address at the eighth annual Princeton Colloquium on Public and International Affairs held in Dodds Auditorium on April 17.   The colloquium, titled “The New Normal?   American Policy Making After the Great Recession,” examined the challenges and opportunities that the recent economic crisis has created for American policy makers.

She first focused on raising unemployment rates with economic policies and described programs for returning to the pre-recession status quo.   But she then asked, “Can we do better than that? Can the normal that we get back to be better than before?”

While discussing the efficacy of the economic stimulus, Romer stressed the importance of revitalizing aggregate demand and outlined major policy areas that could build a better normal for the future.

“Over the long haul, in the absence of corrective action, [the deficit] will grow tremendously, largely due to rising health care costs,” she said.   “Regardless of the source, the budget deficit has to be addressed.”

She continued to emphasize structural changes and argued for “policies that rebalance the composition of the economy’s output.”   This creates, she said, new investment opportunities in areas like clean energy and biotechnology, as well as more stability than “a normal built on borrowing.”

This structural rebuilding of the American system after the recession served as a unifying theme throughout the colloquium, with a variety of speakers commenting on the betterment of economic, financial, congressional, and foreign policies.

Alan Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve, moderated the second panel and discussed the dangers of a rising American deficit in light of the recently passed health care reforms.   He was joined by Joshua Bolten ’76, former Chief of Staff to President George W. Bush and former director of the Office of Management and Budget, Uwe Reinhardt, James Madison Professor of Political Economy, and Alice Rivlin, director of the Economic Studies Program at Brookings.

“The old budget normal, the one I started with, was not the least bit attractive,” Bolten said of his time at the OMB.   “The new normal is ugly, and has gotten much uglier in the last few years.”

Bolten opened the panel, and outlined recent federal spending trends of what he called a “grave fiscal situation.”   He asserted, “We face a crisis of overspending, not undertaxing.”

Reinhardt’s animated presentation, punctuated by outbursts of laughter from a packed auditorium, underscored Bolten’s calls for reducing the deficit while increasing government revenues and cutting Medicare spending.   Jokingly, he also posed the alternative: ask the Chinese to pay for the cost-revenue gap.

“What can be done about this situation?   First let me tell you what not to do,” Reinhardt said.   “Don’t ever again graciously bestow Medicare benefits on the elderly and let our children pay for it as we did in the Medicare Modernization Act of 2003, and in the interest of nonpartisanship, I forgot who it was.”

Rivlin added other alternative policies to the conversation, further substantiating the argument for taxes and budget cuts.   Stressing the need to keep the recovery intact, she outlined policies to cut deficits while maintaining the stimulus on course.

“We could … enact taxing or spending legislation that would begin to bring down deficit spending in the future that would have nothing to do with derailing the recovery, and might even make the recovery faster,” she said.   “It would reassure our creditors around the world that we were serious about deficit reduction in the future.”

Moving from a focus on economics to American foreign policy, former U.S. Ambassador to Iceland James Gadsden MCF *85 moderated a panel questioning the existence of an “Obama doctrine.”

G. John Ikenberry, Professor of Politics and International Affairs in the School, argued, “I don’t think there’s an Obama doctrine yet, but there’s an Obama style, a vision of America in the world.”   He described that vision as “pragmatic internationalism.”

Calling Obama’s policy style as a “blend of liberalism and realism,” Ikenberry pinpointed the main idea of the President’s international policy as “security interdependence,” which emerges as strategies of engagement and dialogue.   Col. Michael Meese agreed, and described Obama’s policy as bipartisan and pragmatic: promoting engagement while wielding soft power with a military stick.

Concluding the panel, former Ambassador to Yemen Barbara Bodine noted that presidential doctrines are made typically in response to particular events, like the Truman or Eisenhower Doctrines.   It is too early in Obama’s career, she said, to sketch his doctrine.

The fourth panel, moderated by Professor Markus Brunnermeier and titled “U.S. Financial Market Regulation: Stemming Risk or Stifling Growth?”, emphasized the need to diffuse systemic risk throughout the market, reducing international arbitrage in response to regulation, and limiting moral hazard.

“The new regulatory framework must address the issue of increased systemic risk while not suppressing risk-taking per se,” the Security and Exchange Commission’s Sherman Boone MPA *79 said.   “We want to end up in a world where, in fact, we can afford to let financial entities fail if they make bad decisions.”

Alan Krueger, Assistant Secretary for Economic Policy and Chief Economist of the Treasury, stressed the need for increased supervision of “opaque” markets in the financial system and more transparency for all derivatives.   Further, he proposed “limiting the abilities of the Federal Reserve and the FDIC to provide loans and guarantees that would sustain individual failing financial institutions.”

But lecturer at Harvard Business School Robert Pozen posed caveats to reformers who placed too much importance in the role of banks.   Citing that 25% of loans in 2006 originated in banks, Pozen drew attention to the role of non-bank lenders and mortgage brokers.   He also proposed his theory of “too small to fail,” questioning the criteria for bank bailouts in light of 690 such actions in the last two years.

Loretta Mester *85, Executive Vice President at the Federal Reserve Bank of Philadelphia, also warned reformers of the dangers of simply pushing risk-taking outside of the financial regulatory structure.   She proposed a cap-and-trade charge to contributions to systemic risk, and echoed Krueger’s calls for increased Fed responsibility and accountability.

Associate Dean Nolan McCarty moderated the last panel named “The Broken Branch?   Can Congress Rise to the Challenges Ahead?”   The discussion, with U.S. Representatives Rush Holt (D-NJ), Leonard Lance MP *82 (R-NJ), and CBS News Congressional Correspondent Nancy Cordes MPA *99, centered on the increasing polarization of the American legislature and the causes of political division.

Rep. Holt accepted the premise of high levels of cynicism about the government and Congress, but also defended the legislature in light of major acts passed in the recent months.

“If you don’t agree with how this country is run, why have we been so successful?” Holt asked.   “You can’t argue with success.”

Rep. Lance pointed to a few key problems that underlie the current polarization, including the need to aggressively campaign for money, the fact that many districts across the country are not competitive, the role of the polarized media, and the lack of cordiality and socialization between parties like in the “old days.”

“Being a moderate dealmaker, which used to be a badge of honor on Capitol Hill, can now get you labeled as a traitor,” Nancy Cordes said.

Jon Corzine, former New Jersey Governor and New Jersey Senator, closed the colloquium with his keynote address on “Restoring the Social Contract.”   Introduced by President Shirley Tilghman, Corzine began by saying “The social contract between people and their public institutions is in a state of serious disrepair.”

A former Chairman and CEO of Goldman Sachs, Corzine also echoed the serious need for deficit cuts in the post-recession period of economic self-reflection.

“We are now at an unsustainable level of debt service,” he said.   “Correcting this problem is going to be one of the most enormous challenges facing our society, but if we don’t do it, we are going to back ourselves into an inability to deal with the challenges that our kids, our grandkids, will have to.”

In light of these economic reforms, Corzine also stressed the need for financial regulation overhaul, deficit cuts, a new economic model in the globalized world, and decreasing the level of income inequality.

“These are things that I think can build people’s trust in institutions and in relationships with each other,” he concluded.   “I hope that we can have today and next year and long into the future civil ways for how we rework some of the things that we have to build together for the 21^st century.”