CAMBRIDGE, MASS.—Harvard economist Kenneth S. Rogoff has exactly the message that Washington—especially President Obama—doesn’t want to hear: Sorry, there are no quick fixes for America’s economic ailments, and no roaring recovery lurks around the corner. “This is absolutely not like a typical postwar U.S. recession,” he says. It is a severe “contraction” caused by a financial crisis that originated in the housing bust and has mired the nation deeply in debt. So, policymakers need to think outside the box. A little inflation, anyone? Yes, Rogoff advises—as one mechanism to ease the burden on borrowers.
Rogoff, a self-described “Rockefeller Republican,” compels attention. The nation’s entrenched economic woes are confirming the thesis that he and Carmen M. Reinhart laid out in their ironically titled 2009 book, This Time Is Different: Eight Centuries of Financial Folly. A native of Rochester, N.Y., and a teenage chess prodigy, Rogoff is a former staff economist at the Federal Reserve Board and the International Monetary Fund. He speaks with a sober mien that matches his sobering prognosis.
What’s the problem with the U.S. economy?
ROGOFF: There is a big overhang of private debt and, increasingly, public debt. That’s the reason the recovery has been so slow. Ultimately, if we don’t find a way to deal with this, we’re Japan. In fact, maybe we’d be worse than Japan. We could be growing very slowly for a very long time.
What needs to be done?
ROGOFF: One way or another, there needs to be deleveraging—in some cases, debt forgiveness. Creditors are not going to think it is fair, no matter what we do. But the fact is that a lot of the debt on the books today is not going to get paid. Something like 25 percent of mortgages are underwater. A significant percentage of those will end up not being paid in full.
You’ve also advocated “moderate inflation” on the order of 4 percent to 6 percent a year—but you were an inflation hawk when you worked at the Fed back in the 1980s.
ROGOFF: There’s a very strong case that we could use a higher inflation rate right now. It would help stimulate investment, consumption. You’re basically transferring income from high-savings individuals to low-savings individuals.
How would an inflation program work?
ROGOFF: You announce the inflation rate you are trying to achieve, and you essentially print money until it happens. If inflation exceeds that, you rapidly start tightening.
What else needs to be done?
ROGOFF: Deleveraging is going to mean collecting more taxes. The key is keeping marginal tax rates low so people have an incentive to work—but reducing deductions, including lowering the home-mortgage deduction.
With unemployment stuck at around 9 percent, Keynesians would like to see another big fiscal stimulus. What do you think?
ROGOFF: The idea that a giant, debt-funded, fiscal stimulus is the answer puts too little weight on businesses and individuals being worried about their future taxes. If we’re going to spend money to sort of grease the wheels of deleveraging, of mortgage write-downs, I am very amenable to that idea.
Your book argues that countries always think booms will last—that “this time” really will be different. Is America, with its robust doctrine of “exceptionalism,” especially prone to this incautious mind-set?
ROGOFF: The United States is different, but we’re not as different as we think. The idea that [a bust] couldn’t happen was a wrong read of history. If you look at a long enough sweep of history, it is not clear that advanced countries ever outgrow banking crises.
Did economics itself fail in not anticipating the crisis?
ROGOFF: There was this triumphalism in macroeconomics, finance, but the financial crisis has uncovered these huge holes. For my students at Harvard, that is very exciting.
The writer is a contributing editor to National Journal and the author of After America: Narratives for the Next Global Age.
This article appears in the October 14, 2011 edition of National Journal Magazine.
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