kenneth rogoff picturepaul krugman picturePaul 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 is  now professor at Harvard University, and co-author of This Time Is Different .




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Part I:


Part II:


Transcription is below:

[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.

[Is there some upper limit? You can’t keep spending money forever and incur these larger debt loans?]

Krugman —
The main thing is the costs versus the benefits. Basically the US government can borrow money and repay in constant dollars less than it borrowed [Amazing]
Are we really saying there are no huge projects the federal government can undertake that have even a small positive rate of return? Especially when there are resources to employ?
The world wants to hold US Treasuries.

Rogoff —
I think you have to be careful. Interest rates were also very low for sub-prime borrowers. Interest rates can turn like the weather. But I also question if untargeted stimulus would really work. Infrastructure spending if well spent that’s great, I’m all for that. I’d borrow for that assuming we are not paying so much for it.

[Wouldn’t Keynes say you dig a ditch and spend money on it?]

Krugman —
It’s very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed you could get that. So think about using all of these things together, you could achieve a great deal.

{They talk about space aliens for a bit}

Krugman —
These hypothetical things are leaving us doing nothing about the actual thing that’s happening, which is mass unemployment, mass waste of human resources, mass waste of physical resources. We are haemorrhaging economic possibilities and also destroying a lot of lives by letting this economic crisis drag on [Amazing].

Rogoff —
You need to get the debt levels down. We are growing slowly and the debt problems start blowing up on you. That’s happening very dramatically in Europe. They said “things are going to get better, this is an ordinary but big recession, if we can just hang on the debt problems will go away”. Well guess what, they’re not growing fast enough, the debt problems are imploding. That’s slowing growth and it’s a self-feeding cycle [Amazing].

Krugman —
The thing that’s holding us back is private sector debt. And we need to bring that down relative to incomes. So you need policies to get incomes to grow but that reduce private sector debt. It could include forgiveness [!] You don’t have to wait for some natural process. We need very activist government policies.