A recent article, "Why America isn't working", by Kenneth Rogoff, ex-chief
economist of the IMF, writing in Project-Syndicate.org, is so badly
entitled that it almost amounts to trade mis-description. He describes
where America is now with high unemployment. He then criticises Keynesian
methods of trying to solve the problem. He then puts forward what can only
be described as a Keynesian solution. Finally he leaves the reader dangling
at the end wondering why Rogoff didn't actually explain why America isn't
working.
Rogoff never once mention automation or computerization. He never once
mentions that the US government lost so much control over its own money
that there were several times more of it available as consumer, corporate
and derivatives credit than had ever been in circulation in the real world.
If he were to admit these things then he would have to start to think about
real solutions to the mess that now afflicts all of the Western world. He
seems to think that because he and Carmen Reinhart have written a book
about financial crises in the past 800 years then that qualifies him to
have something to say about this one. The fact is that both of the main
factors that have caused this one were simply not existent in any of the
previous crises, not even that of the 1930s.
Keith
<<<<<
WHY AMERICA ISN'T WORKING
Kenneth Rogoff
As the US economy limps toward the second anniversary of the Lehman
Brothers bankruptcy, anemic growth has left unemployment mired near 10%,
with little prospect of significant improvement anytime soon. Little wonder
that, with mid-term congressional elections coming in November, Americans
are angrily asking why the government's hyper-aggressive stimulus policies
have not turned things around. What more, if anything, can be done?
The honest answer -- but one that few voters want to hear -- is that there
is no magic bullet. It took more than a decade to dig today's hole, and
climbing out of it will take a while, too. As Carmen Reinhart and I warned
in our 2009 book on the 800-year history of financial crises (with the
ironic title This Time is Different), slow, protracted recovery with
sustained high unemployment is the norm in the aftermath of a deep
financial crisis.
Why is it so tough to boost employment rapidly after a financial crisis?
One reason, of course, is that the financial system takes time to heal --
and thus for credit to begin flowing properly again. Pumping vast taxpayer
funds into financial behemoths does not solve the deeper problem of
deflating an over-leveraged society. Americans borrowed and shopped until
they were blue in the face, thinking that an ever-rising housing price
market would wash away all financial sins. The rest of the world poured
money into the US, making it seem as if life was one big free lunch.
Even now, many Americans believe that the simple solution to the nation's
problem is just to cut taxes and goose up private consumption. Cutting
taxes is certainly not bad in principle, especially for supporting
long-term investment and growth. But there are several problems with the
gospel of lower taxes.
First, total public-sector debt (including state and local debt) is already
nearing the 119%-of-GDP peak reached after World War II. Some argue
passionately that now is no time to worry about future debt problems, but,
in my view, any realistic assessment of the medium-term risks does not
permit us simply to dismiss such concerns.
A second problem with tax cuts is that they might well have only a limited
impact on demand in the short run, with the private sector hoarding a
significant share of the funds to repair badly over-leveraged balance sheets.
Last but not least, there is a fairness issue. By some measures, nearly
half of all Americans do not pay any income tax already, so cutting taxes
skews an already very unequal income distribution. Deferred maintenance on
income equality is one of many imbalances that built up in the US economy
during the pre-crisis boom. If allowed to fester, the political
consequences could be severe, including trade protectionism and perhaps
even social unrest.
Those who think that the government should take up the slack in private
spending point out that there is an abundance of growth-enhancing projects
-- a point that should be obvious to anyone familiar with America's fraying
infrastructure. Likewise, transfers to state and local governments, which
have limited constitutional scope to borrow, would help slow down wrenching
layoffs of teachers, firefighters, and police. Lastly, extending
unemployment insurance in the wake of a once-in-a-half-century crisis
should be a no-brainer.
But, unfortunately, Keynesian demand management is no panacea, either. Nor
can the government always be the employer of last resort. While tax cuts
enhance long-term productivity, expanding the government sector is hardly a
recipe for economic vitality. There are surely many useful activities for
the government to undertake in a market economy, but a frenzied orgy of
stimulus spending is not conducive to rational discussion of what they
should be. And of course, there again is the matter of the soaring national
debt.
All in all, the G-20's policy of aiming for gradual stabilization of growth
in government debt, bringing it into line with national-income growth by
2016, seems a reasonable approach to balancing short-term stimulus against
longer-term financial risks, even at the cost of lingering unemployment.
While America is facing the limits of fiscal policy, monetary policy can do
more, as Federal Reserve Chairman Ben Bernanke detailed in a recent speech
in Jackson Hole, Wyoming. With credit markets impaired, the Fed could buy
more government bonds or private-sector debt. Bernanke also noted the
possibility of temporarily raising the Fed's medium-term inflation target
(a policy that I suggested in this column in December 2008).
Given the massive de-leveraging of public- and private-sector debt that
lies ahead, and my continuing cynicism about the US political and legal
system's capacity to facilitate workouts, two or three years of slightly
elevated inflation strikes me as the best of many very bad options, and far
preferable to deflation. While the Fed is still reluctant to compromise its
long-term independence, I suspect that before this is over it will use
most, if not all, of the tools outlined by Bernanke.
The bottom line is that Americans will have to be patient for many years as
the financial sector regains its health and the economy climbs slowly out
of its hole. The government can certainly help, but beware of pied pipers
touting quick fixes.
Kenneth Rogoff is Professor of Economics and Public Policy at Harvard
University, and was formerly chief economist at the IMF.
>>>>>
Keith Hudson, Saltford, England
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