## Three Ways of Looking at Ken Rogoff

We are, again, live at the Financial Times:

FT.com / Comment / Opinion - Rogoff is wrong on debt worries: I read Ken Rogoff writing that maybe expansionary fiscal policy isn’t all that effective – we don’t really know: “Stimulus benefits of... deficits are not nearly so certain.... Aggressive fiscal stimulus... was reasonable as part of an all-out battle to avoid slipping into a depression... Today, the panic has abated and a more sober cost-benefit analysis is required...”

I read Prof Rogoff writing that the real brake on the speed of recovery are central banks, which won’t let the economy grow “too fast” and will take steps to offset further fiscal stimulus as of, more or less, right now: “Governments that emphasise long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions... Otherwise... they will rightly worry about being gamed into inflationary finance of runaway deficits...”

I sense three things in Prof Rogoff’s thought with which I disagree.

First, a different assessment of the current policy path: Prof Rogoff believes that central banks worldwide are about to start to tighten – and will tighten faster the larger are current deficits, and so additional deficit spending over the next three years is unlikely to generate much if any demand. I believe that the Bank of England and the European Central Bank are about to do so – but should not. And I see the Federal Reserve as recognising the weakness of the recovery and as unwilling to take contractionary monetary policy steps to offset the effects of Office of Management and Budget fiscal policy or Treasury banking policy stimulus.

Second, a different assessment of the speed limit of recovery: Prof Rogoff sees the economy now as suffering from structural maladjustments generated by the expansion of the 2000s in which workers must be trained in new kinds of jobs and shifted over to different sectors in which they have no previous experience, and that that process cannot proceed rapidly without generating inflationary pressures that will destabilise confidence in price stability. I see an economy in which there is enormous slack pretty much everywhere – empty retail storefronts in Berkeley just to my left, anyone? – in which even the US housing stock is no longer above its trend, and in which we are currently building houses at half the trend pace. If output in even our single-family residential-housing sector is significantly depressed below its steady-state growth value – if, economy-wide, 10 per cent of the spending that ought to be there is missing – then we need not policies that carefully create new jobs only in the appropriate sectors but instead policies that create new jobs pretty much anywhere.

Third, an inappropriate linkage between short-term and long-term policy horizons that are not connected: as best as I can figure out, CBO director Doug Elmendorf’s judgment as expressed in his recent Long-term Budget Outlook is that if the policies enacted in the Obama Health Care Reform Bill can be sustained then it has reduced projected primary US federal deficits over the next 50 years by $12,600bn. That’s 16 stimulus packages the size of the Obama 2009 ARRA stimulus. That’s 370 times as much as this afternoon’s unemployment insurance extension. Solidifying the long-term foundations of fiscal sanity is, as Larry Summers said in his contribution, completely at right angles to the question of how much the US federal government does to boost demand and be a good customer for world businesses over the next two years when private households and businesses are not going to be such good customers. You can do both – and we should be doing both – and the Obama administration has taken major strides at doing both. And even big short-term stimulus measures have a trivial effect on the long-term budget picture. Rogoff will respond that, unless you tighten fiscal policy now when doing so raises unemployment, nobody will ever believe that you will maintain fiscal discipline over the long run. The best rebuttal to that point I have ever seen is Martin Wolf’s: “Let us translate this proposal into ordinary language: ‘If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.’ But might it not make sense to get better first?” My original draft: I read Ken Rogoff writing that maybe expansionary fiscal policy isn't all that effective--we don't really know: "[S]timulus benefits of... deficits are not nearly so certain.... Aggressive fiscal stimulus... was reasonable as part of an all-out battle to avoid slipping into a depression.... Today, the panic has abated, and a more sober cost-benefit analysis is required..." I read Ken Rogoff writing that the real brake on the speed of recovery are central banks, which won't let the economy grow "too fast" and will take steps to offset further fiscal stimulus as of, more or less, right now: "[G]overnments that emphasise long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions.... Otherwise... they will rightly worry about being gamed into inflationary finance of runaway deficits..." I sense three things in Ken Rogoff's thought with which I disagree: 1. A different assessment of the current policy path: Ken Rogoff believes that central banks worldwide are about to start to tighten--and will tighten faster the larger are current deficits, and so additional deficit spending over the next three years is unlikely to generate much if any demand. I believe that the Bank of England and the ECB are about to do so--but should not. And I see the Federal Reserve as recognizing the weakness of the recovery and as unwilling to take contractionary monetary policy steps to offset the effects of OMBfiscal-policy or Treasury banking-policy stimulus. 2. A different assessment of the speed limit of recovery: Ken Rogoff sees the economy now as suffering from structural maladjustments generated by the expansion of the 2000s in which workers must be trained in new kinds of jobs and shifted over to different sectors in which they have no previous experience, and that that process cannot proceed rapidly without generating inflationary pressures that will destabilize confidence in price stability. I see an economy in which there is enormous slack pretty much everywhere--empty retail storefronts in Berkeley just to my left, anyone?--in which even the U.S. housing stock is no longer above its trend, and in which we are currently building houses at half the trend pace. If output in even our single-family residential-housing sector is significantly depressed below its steady-state growth value--if, economy-wide, ten percent of the spending that ought to be there is missing--then we need not policies that carefully create new jobs only in the appropriate sectors but instead policies that create new jobs pretty much anywhere. 3. An inappropriate linkage between short-term and long-term policy horizons that are not connected: As best as I can figure out, CBO Director Doug Elmendorf's judgment as expressed in his recent Long-Term Budget Outlook is that if the policies enacted in the Obama Health Care Reform Bill can be sustained then it has reduced projected primary U.S. federal deficits over the next 50 years by$12,600 billion. That's sixteen stimulus packages the size of the Obama 2009 ARRA stimulus. That's 370 times as much as this afternoon's unemployment insurance extension. Solidifying the long-term foundations of fiscal sanity is, as Larry Summers said in his contribution, completely at right angles to the question of how much the U.S. federal government does to boost demand and be a good customer for world businesses over the next two years when private households and businesses are not going to be such good customers. You can do both--and we should be doing both--and the Obama administration has taken major strides at doing both. And even big short-term stimulus measures have a trivial effect on the long-term budget picture. Rogoff will respond that unless you tighten fiscal policy now when doing so raises unemployment nobody will believe that you will maintain fiscal discipline over the long run. The best answer to that point I have ever seen is Martin Wolf's: "Let us translate this proposal into ordinary language: ‘If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.’ But might it not make sense to get better first?"

Gee. Perhaps I need to become a bigger consumer of anti-anxiety medications...

Or perhaps not. Perhaps I see things clearly...