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Three Ways of Looking at Ken Rogoff - Grasping Reality with Both Hands

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Grasping Reality with Both Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, RealityBased, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch July 21, 2010

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 http://delong.typepad.com/sdj/2010/07/three-ways-of-looking-at-ken-rogoff.html

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Three Ways of Looking at Ken Rogoff - Grasping Reality with Both Hands

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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 longterm 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..." And over at the Economist, I read Ryan Avent first of all observing that today's "extension of emergency unemployment benefits... $34 billion... will likely be one of the last fiscally stimulative measures America will get," and second quoting Jan Hatzius and Mark Zandi to the effect that: "declining federal stimulus spending will

http://delong.typepad.com/sdj/2010/07/three-ways-of-looking-at-ken-rogoff.html

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translate into an economic drag as of, more or less, right now..." 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... Brad DeLong on July 21, 2010 at 07:09 AM in Economics, Economics: Federal http://delong.typepad.com/sdj/2010/07/three-ways-of-looking-at-ken-rogoff.html

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Three Ways of Looking at Ken Rogoff - Grasping Reality with Both Hands

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Comments howard said... prof, tell us something: what makes "thought" the appropriate word for rogoff's typing? Reply July 21, 2010 at 08:17 AM Bob Athay said... Maybe I've been reading too much of your blog, or too many draft chapters of your book that you left online. Or maybe it's genetic: my father, after all, is a confirmed "saltwater" economist. But whatever the reason, if I apply the same type of reasoning that served me well in my own field, you (and Krugman) make sense and I have yet to see counter-arguments that pass muster. So far, the only sense I can make of this "debate" is that one side is willing to consider multiple hypotheses and pick those that best fit the data. The other side treats their preferred theory as axiomatic (i.e., *must* be true at all times) and filters their observations accordingly. I really hope I'm missing something here. If not, there are a bunch of big-name economists who should be *required* to pass a rigorous course in thermodynamics followed by a graduate-level introduction to modern physics. (Yes, I know I'm being harsh) Reply July 21, 2010 at 09:42 AM howard said in reply to Bob Athay... bob, very well put, and exactly why i question the use of the word "thought" for rogoff. axioms that depend for their validity upon constructs that don't fit actual observed behavior don't deserve the label "thoughts." Reply July 21, 2010 at 11:23 AM Stirling Newberry said... "In the long run, we are all dead." The macro- instrument is far too blunt to deal with what are meso- and microproblems. Reducing long term investment, when the problem has been caused by lack of long term investment is folly. More over, austerity in the face of deflation has been called for numerous times in the past, the result is almost always a prolonged slump. Perhaps Prof. Rogoff believes that "this time it is different."

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Reply July 21, 2010 at 05:14 PM Michael Turner said... "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." Not quite orthogonal. So it all becomes about the coefficients in the vector sum. If you've got a dime's worth of difference in the vector, maybe you can goose expectations up to a sawbuck's worth of difference. Just just keep repeating to Serious People (and to the public) what you think their expectations should be. Do it from a high enough point, and with a loud enough megaphone. Pretty soon, we'll be in the Bizarro World of Barro, even as Ricardo is quoted as saying how ridiculous such a thing is. Can't happen here? Ho ho. Propaganda tactics like those got us into a housing bubble, and into Iraq. Why can't one make it so, with enough buzz? Why must anything be reality-based? When we've got nothing to fear but fear itself and the fear still won't go away, be afraid. Be very afraid. Reply July 22, 2010 at 01:55 AM Comments on this post are closed.

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Three Ways of Looking at Ken Rogoff - Grasping Reality with Both Hands