governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policy makers in most regions have to start pressing hard on the brakes, not the accelerator.
His view is that rising commodity prices are a message that demand is rising too rapidly. In the U.S., inflationary fiscal and monetary policy is to blame. In many developing countries, government subsidies that insulate consumers from rising commodity prices are at fault. As Rogoff sees it, markets will eventuall adjust to tame the commodity boom, but the process could take years. Meantime, an economic slow-down is in order.
This is an interesting point of view. Rogoff, not known as a right-winger*, seems to have broken sharply from other Keynesians, notably Robert Shiller.
Think of this disagreement in terms of the textbook aggregate supply metaphor (which I don't care for, but that's another story). On the left-most (horizontal) segment, the economy is in recession, and expansionary policies raise output without adding to inflationary pressure. On the right-most (vertical) segment, the economy is near capacity, and expansionary policies add to inflation without doing much to increase output. Shiller fears that we are on the left-most segment, and Rogoff is arguing that we are closer to the right-most segment.
*[UPDATE: Oh yeah? Then what's his name doing on this list of economists supporting McCain?]