10/24/10 1:46 PMThree Ways of Looking at Ken Rogoff - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchJuly 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 Rogoffwriting that maybe expansionary fiscal policy isn’t all that effective – we don’t reallyknow: “Stimulus benefits of... deficits are not nearly so certain.... Aggressive fiscalstimulus... was reasonable as part of an all-out battle to avoid slipping into adepression... Today, the panic has abated and a more sober cost-benefit analysis isrequired...”

I read Prof Rogoff writing that the real brake on the speed of recovery are centralbanks, which won’t let the economy grow “too fast” and will take steps to offset furtherfiscal stimulus as of, more or less, right now: “Governments that emphasise long-termfiscal sustainability are likely to have an easier time inducing their central banks tomaintain highly supportive monetary conditions... Otherwise... they will rightly worryabout 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 thatcentral banks worldwide are about to start to tighten – and will tighten faster the largerare current deficits, and so additional deficit spending over the next three years isunlikely to generate much if any demand. I believe that the Bank of England and theEuropean Central Bank are about to do so – but should not. And I see the FederalReserve as recognising the weakness of the recovery and as unwilling to takecontractionary monetary policy steps to offset the effects of Office of Management andBudget fiscal policy or Treasury banking policy stimulus.

Second, a different assessment of the speed limit of recovery: Prof Rogoff sees theeconomy now as suffering from structural maladjustments generated by the expansion

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of the 2000s in which workers must be trained in new kinds of jobs and shifted over todifferent sectors in which they have no previous experience, and that that processcannot proceed rapidly without generating inflationary pressures that will destabiliseconfidence in price stability. I see an economy in which there is enormous slack prettymuch everywhere – empty retail storefronts in Berkeley just to my left, anyone? – inwhich even the US housing stock is no longer above its trend, and in which we arecurrently building houses at half the trend pace. If output in even our single-familyresidential-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 sectorsbut instead policies that create new jobs pretty much anywhere.

Third, an inappropriate linkage between short-term and long-term policy horizons thatare not connected: as best as I can figure out, CBO director Doug Elmendorf’sjudgment as expressed in his recent Long-term Budget Outlook is that if the policiesenacted in the Obama Health Care Reform Bill can be sustained then it has reducedprojected primary US federal deficits over the next 50 years by $12,600bn. That’s 16stimulus packages the size of the Obama 2009 ARRA stimulus. That’s 370 times asmuch as this afternoon’s unemployment insurance extension. Solidifying the long-termfoundations of fiscal sanity is, as Larry Summers said in his contribution, completely atright angles to the question of how much the US federal government does to boostdemand and be a good customer for world businesses over the next two years whenprivate households and businesses are not going to be such good customers. You cando both – and we should be doing both – and the Obama administration has takenmajor strides at doing both. And even big short-term stimulus measures have a trivialeffect on the long-term budget picture.

Rogoff will respond that, unless you tighten fiscal policy now when doing so raisesunemployment, nobody will ever believe that you will maintain fiscal discipline overthe long run. The best rebuttal to that point I have ever seen is Martin Wolf’s: “Let ustranslate this proposal into ordinary language: ‘If you are unwilling to starve yourselfwhen 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 slippinginto a depression.... Today, the panic has abated, and a more sober cost-benefitanalysis is required..."

I read Ken Rogoff writing that the real brake on the speed of recovery are centralbanks, which won't let the economy grow "too fast" and will take steps to offset furtherfiscal 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 banksto maintain highly supportive monetary conditions.... Otherwise... they will rightlyworry 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 ofthe last fiscally stimulative measures America will get," and second quoting JanHatzius and Mark Zandi to the effect that: "declining federal stimulus spending will

10/24/10 1:46 PMThree Ways of Looking at Ken Rogoff - Grasping Reality with Both Hands

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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 centralbanks worldwide are about to start to tighten--and will tighten faster the larger arecurrent deficits, and so additional deficit spending over the next three years isunlikely to generate much if any demand. I believe that the Bank of England andthe ECB are about to do so--but should not. And I see the Federal Reserve asrecognizing the weakness of the recovery and as unwilling to take contractionarymonetary policy steps to offset the effects of OMBfiscal-policy or Treasurybanking-policy stimulus.

2. A different assessment of the speed limit of recovery: Ken Rogoff sees the economynow as suffering from structural maladjustments generated by the expansion ofthe 2000s in which workers must be trained in new kinds of jobs and shifted overto different sectors in which they have no previous experience, and that thatprocess cannot proceed rapidly without generating inflationary pressures that willdestabilize confidence in price stability. I see an economy in which there isenormous slack pretty much everywhere--empty retail storefronts in Berkeley justto my left, anyone?--in which even the U.S. housing stock is no longer above itstrend, and in which we are currently building houses at half the trend pace. Ifoutput in even our single-family residential-housing sector is significantlydepressed below its steady-state growth value--if, economy-wide, ten percent ofthe spending that ought to be there is missing--then we need not policies thatcarefully create new jobs only in the appropriate sectors but instead policies thatcreate new jobs pretty much anywhere.

3. An inappropriate linkage between short-term and long-term policy horizons thatare not connected: As best as I can figure out, CBO Director Doug Elmendorf'sjudgment 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 ithas 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 2009ARRA stimulus. That's 370 times as much as this afternoon's unemploymentinsurance extension. Solidifying the long-term foundations of fiscal sanity is, asLarry Summers said in his contribution, completely at right angles to the questionof how much the U.S. federal government does to boost demand and be a goodcustomer for world businesses over the next two years when private householdsand businesses are not going to be such good customers. You can do both--and weshould be doing both--and the Obama administration has taken major strides atdoing both. And even big short-term stimulus measures have a trivial effect on thelong-term budget picture. Rogoff will respond that unless you tighten fiscal policynow when doing so raises unemployment nobody will believe that you willmaintain fiscal discipline over the long run. The best answer to that point I haveever 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 believeyou would adopt a sensible diet when well.’ But might it not make sense to getbetter 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

10/24/10 1:46 PMThree 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 AMBob Athay said...Maybe I've been reading too much of your blog, or too many draft chapters of yourbook 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 reasoningthat served me well in my own field, you (and Krugman) make sense and I have yet tosee counter-arguments that pass muster.

So far, the only sense I can make of this "debate" is that one side is willing to considermultiple hypotheses and pick those that best fit the data. The other side treats theirpreferred theory as axiomatic (i.e., *must* be true at all times) and filters theirobservations accordingly. I really hope I'm missing something here. If not, there are abunch of big-name economists who should be *required* to pass a rigorous course inthermodynamics followed by a graduate-level introduction to modern physics. (Yes, Iknow I'm being harsh)

Reply July 21, 2010 at 09:42 AMhoward 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 observedbehavior don't deserve the label "thoughts."

Reply July 21, 2010 at 11:23 AMStirling Newberry said..."In the long run, we are all dead."

The macro- instrument is far too blunt to deal with what are meso- and micro-problems. Reducing long term investment, when the problem has been caused by lackof long term investment is folly. More over, austerity in the face of deflation has beencalled 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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Me: Economists:

PaulKrugmanMark ThomaCowen andTabarrokChinn andHamiltonBrad Setser

Juicebox

Mafia:

Ezra KleinMatthewYglesiasSpencerAckermanDanaGoldsteinDanFroomkin

Moral

Philosophers:

Hilzoy andFriendsCrookedTimber ofHumanityMarkKleiman andFriendsEric

Reply July 21, 2010 at 05:14 PMMichael Turner said..."Solidifying the long-term foundations of fiscal sanity is, as Larry Summers said in hiscontribution, completely at right angles to the question of how much the US federalgovernment does to boost demand and be a good customer for world businesses overthe next two years when private households and businesses are not going to be suchgood customers."

Not quite orthogonal. So it all becomes about the coefficients in the vector sum. Ifyou've got a dime's worth of difference in the vector, maybe you can goose expectationsup to a sawbuck's worth of difference. Just just keep repeating to Serious People (andto the public) what you think their expectations should be. Do it from a high enoughpoint, and with a loud enough megaphone. Pretty soon, we'll be in the Bizarro World ofBarro, 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 bereality-based?

When we've got nothing to fear but fear itself and the fear still won't go away, beafraid. Be very afraid.

Reply July 22, 2010 at 01:55 AMComments on this post are closed.

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