Shorter Rogoff: It takes a long time for employment to recover from a financial crisis. There is only so much that tax cuts and government spending can do. Better to inflate our way to recovery through low interest rates. But that will take a long time to work, so we must be patient.
My response: If you don't know where you're going, it doesn't matter how long it will take you to get there. Rogoff's destination is a vague and inaccurate metaphor: the financial sector "regaining its health" and the economy "climbing out of its hole". Actually, that's FOUR vague and inaccurate metaphors cobbled together into a seemingly sensible but essentially nonsensical phrase. On Thu, Sep 16, 2010 at 6:12 AM, Keith Hudson <[email protected]> wrote: > 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 > > _______________________________________________ > Futurework mailing list > [email protected] > https://lists.uwaterloo.ca/mailman/listinfo/futurework > > -- Sandwichman _______________________________________________ Futurework mailing list [email protected] https://lists.uwaterloo.ca/mailman/listinfo/futurework
