Paul Krugman v Kenneth Rogoff pt 1

14 Aug 2011
Paul Krugman is winner of the 2008 Nobel Prize in Economics and columnist for the NY Times.
Kenneth Rogoff is Former chief economist at the IMF and now professor at Harvard University.

[We saw a huge great demand for US Treasuries despite the S&P downgrade]

Krugman --
Investors are not afraid of what the policy elite (or S&P) are telling them. In reality markets are terrified of prolonged stagnation, maybe another recession. US government debt is seen as the safest thing out there. The downgrade could lead to more contraction. This is a wake up call. The really scary thing is a reduced version of the Great Depression in the western world.

Rogoff --
The US is still best compared to the rest. There is a financial panic. One third is low growth, two-thirds are people thinking there's nobody home. It's that which is driving the market.


[You say this is part of a broader phenomenon. People are realizing this is not a classic recession or cyclical downturn. This is a 'great contraction'?]

Rogoff --
Well recessions we have periodically but we have not had a financial crisis as we are having now. Carmen Reinhart and I think of this as the second great contraction (the first being the Great Depression). It is not just unemployment or output, but also credit and housing which are also contracting. These things last much longer because of the debt overhang we started with. After a typical recession we come galloping out. Six months after it ended you're back to where you started; another 6 to 12 months you're back to trend. In a financial crisis it can take 4 to 5 years to get back to where you started.


[So Paul Krugman, the implication of what Ken is saying is that spending large amounts of money on stimulus programs is not the answer because until the debt overhang works its way off you are not going to get back to trend growth?]

Krugman --
No that's not at all what it implies. The way I think about this is not that much different to Ken's. I certainly believed this was going to be different from the v-shaped recession. We need the government to sustain spending, to maintain income so the private sector can work down that debt.


Rogoff --
I think we part ways here. It is not a typical recession. I think if we bring down mortgage rates I would support that. Obviously if things go from bad to worse then you bring out more things from the tool kit.


Krugman --
It's already gone from bad to worse! We have 9% unemployment and long-term unemployment not seen since the Great Depression. At this point we want to throw everything we have against it.
I'm not sure fiscal stimulus is a magic bullet, but nor is inflation a magic bullet.
After WW2 we have a massive amount of inflation which reduced the debt [!]

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[redarrowhead2]

finally, the entire interview. thank you.

[MrNChoudhury]

@redarrowhead2

No problem, hope it helped.

[sufy10]

thanx man