I wrote yesterday that I think the Reinhardt & Reinhardt finding that economies in the wake of a financial crisis typically experience years of slow growth is evidence that such crises are normally met with an inadequate policy response. The other read, the one that both Reinhardt’s and Carmen Reinhardt’s co-author Ken Rogoff seem to prefer, is that years of suffering are just quasi-inevitable. But it’s a little bit hard for me to understand why they take this line. In his latest piece, for example, Rogoff is full of gloom and doom but actually sees plenty of policy steps that could improve things.
In terms of fiscal policy, he agrees that stimulus could be helpful but thinks it might also be counterproductive unless we simultaneously tackle the long-term deficit situation. And he also thinks monetary expansion could help.
So despite the rhetoric of despair and how “It took more than a decade to dig today’s hole, and climbing out of it will take a while, too,” Rogoff doesn’t really seem to believe that. What climbing out of it will take, according to Rogoff, is decisive congressional action to pair short-term deficit expansion with long-term deficit reduction, combined with decisive Federal Reserve Open Market Committee action to raise the price level. If it takes a long time to climb out, that’s because his judgment is that those things are unlikely to happen. And I agree, they are unlikely to happen. But people shouldn’t confuse a political analysis of despair with an economic analysis.
This all reminded me of the last graf of John Cassidy’s profile of Tim Geithner from several months back:
“Why do policymakers screw up financial crises?” [Treasury Secretary Geithner] said before I left his office. “They screw up financial crises because the politics are horrible, and that deters action. They are slow and late and tentative and weak because they are scared to death of the politics. But sometimes a policymaker has to say, I’ll take pain now against pain later.”
That’s exactly right. It was right then and it’s right today.