Arnold Kling  

Ken Rogoff Calls for a Slow-Down

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He writes,


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?]


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CATEGORIES: Macroeconomics



COMMENTS (4 to date)
Grant writes:

The level of uncertainty about economic policy prescriptions is alarming.

Imagine you had a group of surgeons gathered around a patient, and they could not decide what exactly was wrong or where to cut. Could you imagine them putting it to a vote?

fundamentalist writes:

Grant: "The level of uncertainty about economic policy prescriptions is alarming."

Welcome to the world of mainstream/Keynesian economics. It's been this way since the mid-1970's. You can understand why so few people have even a shred of respect left for macro econ. You might give Austrian econ a try. It would side with Rogoff on this one.

Gary Rogers writes:

I think Arnold is correct in recognizing that Rogoff is thinking in a two dimensional framework. You stimulate or you put the brakes on. In fact, an economy is much more complex and anything that is out of balance can cause it to stall. With that, I agree with Rogoff that years of easy money to stimulate the economy has caused many of the problems we face today. However, Describing the solution as putting on the brakes is both vague and scary. If he means actively strengthening the dollar, I agree. If he truly means going for less growth, I strongly disagree.

If you look at our economic situation today, it can be linked to exactly the type of behavior that is promoted by easy money. Excess consumption, lack of savings and overlevereged institutions are all symptoms. A savings account in a bank earns less than one percent interest, so why would people save? And, without savings, we do not have the capital to maintain continued growth. This can lead to a serious adjustment period (recession) where everyone needs to deleverage and build again. This is not the classic recession where there is capital that is not being used, but a more serious adjsutment requiring a longer rebuilding period.

An economy that goes into a recession is like a car that won't start. Continuing to step on the gas may not be the right solution. What will it take to start understanding economic policy enough so we can quit shooting ourselves in the foot? Right now I see John Herbert Hoover McCain running against Barack FDR Obama and it does not make me very comfortable. They need some economic guidance and too many economists taking the political route.

Dr. T writes:
Rogoff, not known as a right-winger*...
Oh yeah? Then what's his name doing on this list of economists supporting McCain?
McCain is not a right-wing republican.
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