Ken Rogoff is right on when he diagnoses the current cycle as a Great Contraction, not a Great Recession. (see must read article copied below).
Having said that, Rogoff is still stuck with the silly idea that policy makers can fix macro problems with fiscal and/or monetary policy. Rogoff argues money printing (i.e. increasing the Cpi target to 4 - 6% for several yrs) will solve the current debt deleveraging problem. Easy money doesn’t and cannot create national wealth. If it did we could just print money and all live happily ever after.
The only realistic solution to a debt deleveraging cycle (caused by an easy money cycle previously) is economic stimulus in the form of supply side reform. Supply side reform encourages entrepreneurial risk taking, which is the engine of any robust and dynamic economy capable of delivering sustainable “high” growth.
Money printing and fiscal stimulus are two sides of same insidious “easy money” coin. Printing money ultimately means borrowing growth from the future. Fiscal stimulus also means borrowing growth from the future in the form of economic activity paid for with debt.
Professional mainstream economists are in the business of figuring out what I call “free-lunch” policy options. They “sell” their services to policy makers and politicians (on both the left and the right) who are in the business of getting elected by convincing the public they can implement free lunch policies as long as the public votes for them. Policy makers and professional economists are in a mutual symbiotic relationship because professional economists design free lunch policies (that can’t work in the real world because free lunches don’t happen in the real world) and politicians sell these bogus policies to a gullible public.
The real world works according to hard and fast trade-offs.
Neither the government or the market is a silver bullet. Neither the government or the market can magically provide free lunch solutions to social problems.
Let us start with the premise that life isn’t fair and the government can’t level the playing field. Let's also understand that the "market" cannot miraculously fix poverty or fill in all of the pot holes in streets or provide universal health care.
The market also can’t work if it is infected with central bank fiat money printing. The political right loves the central bank printing press just as much as the left. The right is hypocritical for claiming to be a friend of the market when it also supports a central bank printing press. The right needs the central bank to pay for a massive military industrial complex and to provide a back stop bailout mechanism for big finance.
Obviously, the left supports the central bank because it helps facilitate debt financing for social welfare programs.
Neither the political left or right is willing to talk the language of trade-offs because to talk trade-offs means upsetting special interest groups.
Bottom line: the government can't fix social problems. if we want the government to solve macro level social and economic "problems," we MUST accept lower economic dynamism and a lower rate of GDP growth. Politicians promise higher sustainable growth AND lower income inequality AND less poverty AND universal healthcare if only the government got involved in green energy, education, technology R&D development, etc. etc. etc.
Sorry to pop the bubble .... "IT" doesn't work that way. if government gets involved then quality must go down and/or price must go up and/or rationing must be implemented. You don't get better quality at lower price if government takes over. sorry. no free lunches.
if you want universal health care and other trappings of a European welfare society, then you have to admit that the system will eventually blow up as the EZ is blowing up under the weight of duel burdens of low growth and high public debt.
of course the political right nearly took us over the cliff by supporting central bank financing of a guns and butter policy redux from the 1960s while simultaneously claiming the market should be allowed to work. De-regulation doesn't work when the market is distorted by massive injection of central bank facilitated easy money.
Sound money is the only policy anchor that forces politicians to consider trade offs. which is why we've been told sound money can't work in a democracy. the public doesn't want to be told it has to live by trade offs and politicians don't want to be held accountable to telling the public it can't have its cake and eat it too.
i don't agree. i think the public is smarter than that. i believe the public can understand in the concept of tradeoffs because that is the way real life works.
The Second Great Contraction
2011-08-02
CAMBRIDGE – Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy.
The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.
But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.
A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” Carmen Reinhart and I proposed this moniker in our 2009 book This Time is Different, based on our diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession. The first “Great Contraction” of course, was the Great Depression, as emphasized by Anna Schwarz and the late Milton Friedman. The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.
Why argue about semantics? Well, imagine you have pneumonia, but you think it is only a bad cold. You could easily fail to take the right medicine, and you would certainly expect your life to return to normal much faster than is realistic.
In a conventional recession, the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend.
The aftermath of a typical deep financial crisis is something completely different. As Reinhart and I demonstrated, it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. So far, across a broad range of macroeconomic variables, including output, employment, debt, housing prices, and even equity, our quantitative benchmarks based on previous deep post-war financial crises have proved far more accurate than conventional recession logic.
Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.” But, in a “Great Contraction,” problem number one is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.
For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries. For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.
Is there any alternative to years of political gyrations and indecision?
In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.
Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.
The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.
Acknowledging that we have been using the wrong framework is the first step toward finding a solution. History suggests that recessions are often renamed when the smoke clears. Perhaps today the smoke will clear a bit faster if we dump the “Great Recession” label immediately and replace it with something more apt, like “Great Contraction.” It is too late to undo the bad forecasts and mistaken policies that have marked the aftermath of the financial crisis, but it is not too late to do better.
Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.
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