Ken "Ain't Different" Rogoff Crushes The Infinite Dream Of Crude Keynesian Stimulus

Tyler Durden's picture

Following today's dismal GDP print, the massive ongoing borrowing being undertaken by our government, and the Bernankian policies which appear inescapable (and entirely ineffective for anything but the market), we thought Ken Rogoff's recent op-ed from the FT was extremely appropriate.

Authored by Ken Rogoff, originally posted at The FT,

Many foreign observers look at the US budget shenanigans with confusion and dismay, wondering how a country that seems to have it all can manage its fiscal affairs so chaotically. The root problem is not just a hugely elevated level of public debt, or a patently unsustainable trajectory for old age entitlements. It is an electorate deeply divided over the direction of government, with differences compounded by changing demographics and sustained sluggish growth. It is hard to escape the notion that today’s budget battles are but a skirmish in a much longer-term war that won’t be settled soon.

America must shortly answer a series of fundamental questions. For example, as its share of global gross domestic product shrinks from about 20 per cent today to as little as 10 per cent in five decades, should it try to continue to play the role of global policeman? The US spends more than 4 per cent of GDP a year on defence, roughly twice the global average. The Obama administration’s fiscal plans anticipate a peace dividend after withdrawals from wars in Iraq and Afghanistan. The Republican party has reasonably argued that it is unrealistic to expect this quiet to last. At the very least, if military expenditures continue to fall, it becomes more important to have the fiscal capacity to ramp them up in response to new threats. It is also worth noting that if the US were ever forced to surrender the mantle of world policeman to, say, China, foreigners may no longer have quite the same desire for its debt.

Another huge area of disagreement surrounds the question of what services should be provided by the federal government versus the states or the private sector. There is a lot of “low-hanging fruit” here. Productivity improvements in government services have been glacial compared with many other sectors of the economy. A visit to a primary school classroom in many US cities is the closest thing one can get to time travel. One idea that economists have been enamoured with for years is school vouchers but there is strong resistance from entrenched interests. How long will these same interests forestall online classes and computer-graded feedback, initially as a supplement for traditional education structures but eventually as a significant substitute. The fiscal implications are huge, as are the disagreements.

In contrast, infrastructure should be a place of common ground but again there is paralysis. Aside from funding priorities, there is a wide chasm between those who see union domination of infrastructure as key to ensuring high-paying jobs versus those who want infrastructure built, but at reasonable rates. There is the joke about the visiting Chinese group that asks their New York tour guide how long it will take to finish the Second Avenue subway. On being told two years, the Chinese translator hesitates before conveying the response and asks: “Wait a second, you mean two weeks, right?”

One of the US’s greatest assets is its ability to expand immigration without running into land or resource constraints anytime soon. But US immigration policy has long been dominated by emotion, not the cold-blooded, rational economic calculus many other countries apply. There are rigid visa restrictions aimed at keeping out terrorists, some of which remain incredibly counterproductive. Immigration policy has large implications for US debt and the sustainability of entitlements for the indigent population, yet the link seldom receives serious attention.

And of course, healthcare is the mother of all fiscal challenges, as costs rise and the population ages.

The idea that one should just ignore all these problems and apply crude Keynesian stimulus is a dangerous one. It matters a great deal how the government taxes and spends, not just how much. The US debt level is a constraint. A growing number of empirical studies, including my own joint work with Carmen Reinhart, suggest that the US has already reached a debt level that has been associated with slower growth in advanced countries. The fact interest rates are low today does not necessarily mean the US is an exception to this rule – take one look at stagnant Japan’s rates. The dollar’s reserve currency status buys America more room, but how much and for how long? A high debt burden is a problem precisely because it reduces a country’s capacity to deal with future shocks.

The US remains an incredible franchise with many remarkable strengths. The world’s overwhelming presumption is that Americans will find a path to budget sustainability. Nevertheless, it is hard for many in the US to escape the nagging feeling that just maybe this time we won’t. With more than $5tn of US Treasury debt, and memories of the huge inflation of the 1970s and default on gold clauses in the 1930s, foreigners would be right to worry a little.

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asteroids's picture

Stage 1 is complete. Inflate via any means the market. Stage 2 will be "controlled" inflation while at the same time limiting the rate of governement payouts. Stage 3 will elevated estate taxes that strip generational wealth. I see generations living in poverty.

Cycle's picture

I see Paris, 1789,  (vs. 2.01) beta

caShOnlY's picture

Default, repudiation, whatever you want to call it: WE ARE FUKKING BROKE!!!

the only reason we're still in business right now is the world doesn't have a fukking clue how to disengage from the U.S. dollar without a complete global collapse.   So by default the U.S. dollar will eventually cause the coming global collapse.  The gordian knot of reality.

Atomizer's picture

We have been broke since 1913. GITMO will hold our finest thieves under the patriot act. Thank President Bush.

css1971's picture

the world is in the process of dropping the dollar.

Take another decade though.

Monedas's picture

Am I the only one .... again .... who get's it ?  Keynes and Axelrod are genetically disposed cocksucking socialists .... look at the set of their jaws .... and their hungry lips .... their happy little arched eye sockets of a gay cobbler, toy maker or watch repairer .... like Gepetto in Pinnochio .... these guys were born this way .... they cannot change who they are ! They need to be removed from the gene pool !

Kantbelieveit's picture

Let's try this again:

1. A family's finances are different from a government's finances.

2. There is a multiplier effect that relates government spending to overall economic activity.

3. When economic growth is stagnant, government deficit spending acts to increase growth.

4. When economic growth is stagnant, cutting government spending worsens the deficit problem, because tax receipts drop faster than the spending reductions.

5. For a practical demonstration of irrational budget cutting resulting in a double-dip recession, see the current woes of the UK.

6. Keynes was right and Mellon was wrong. Get over it.


sbenard's picture

The multiplier effect is now negative. That changes all the presumptions, and worse yet, the consequences. The past 5-7 years have changed everything! Only the right trigger is necessary to pop the MOther of All Bubbles and bring the house of cards down! But just keep believing that this time really IS different!

Kantbelieveit's picture

Take a look at the relationship between reduced defense spending and the latest quarterly GDP numbers for the US. Then tell me there is no positive multiplier. We know what austerity does. We have seen Cameron's disastrous results in the UK.

Conman's picture

Why are you zeroing in on defense spending? Government spending -all total - has been UP. Under your logic defense sector is more efficient on spreading the wealth. rediculous assertation.

caShOnlY's picture

Kantbelieveit:  "When economic growth is stagnant, government deficit spending acts to increase growth."

Once you understand why we have "stagnant economic growth" all else becomes irrelevant.  The government cannot continually fill a void brough about by credit bubble going bust. 

Occam's razor:

There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved

GNWT's picture

party like it's 1999...


with the Silver Liberation Army...



Monedas's picture

Economies stagnate because of government meddling .... if the economy corrects .... let it .... let people fail .... let new blood enter the economy .... it's as natural as a snake shedding its skin .... it's as natural as a menstrual cycle .... you don't want those to stagnate .... do yo ?

Monedas's picture

There's 50% youth unemployment in some EU countries .... because the old farts who have failed .... won't go .... and let the next generation have a crack .... and there should be a crack in every young, lonely guy's life .... socialism destroys in so many ways !

Kantbelieveit's picture

Remember the GREAT DEPRESSION? It was not caused by "government meddling." Hoover took Mellon's advice and decided to let the pain cure the problem. How did that work out?

Keynes understood that a depression could last a long time unless government spending restored economic activity. That is exactly what the New Deal and WWII spending accomplished. America's debt to GDP during WWII was much higher than it is now, but guess what? Prosperity was restored by massive deficit spending.

It is amazing that the failed austerity policies that prolonged the misery of the Great Depression are now the conventional wisdom of government elites. If you want another decade with 25% unemployment, then cut government spending to the bone and watch the Hellish result.

Oppressed In California's picture

A keynesian in our midst spreading false history.  Hoover greatly increased Federal spending (+50%) and did not practice austerity.  Your vulgar Keynesiansim didn't work then and doesn't work now.  Get real.

sbenard's picture

"The world’s overwhelming presumption is that Americans will find a path to budget sustainability."

"The world's overwhelming presumption" is WRONG! Calamity is certainty! Plan and prepare accordingly!

Coldfire's picture

Keynes is dead. Let's bury him already.

Notarocketscientist's picture

America is NOT the world's policeman - America is the world's biggest THUG and TERRORIST.

Think about it - the US military and CIA are dispatched around the world to maintain an economic empire - they explicitly co-opt or install dictators in countries around the world who are willing to sell out their countries to US corporations - in return they are permitted to get very wealthy - and in the middle east they get to fuck blond sluts as part of the deal. 

So why would the use give up this role?  They would not SAVE MONEY - the country would collapse - because it would then have to compete on fair basis for resources.

See John Perkins Confessions of an Economic Hitman

Apostate2's picture

In my humble opinion this opinion piece nails it.

dunce's picture

He spoke of the current low interest rate as if it might be a result of the free market when it is in fact a rate set by govt. fiat. If the market was not controlled by the fed, interest rates would curb all this spending borrowed money. ZIRP is not a natural market rate function. His glossing over this casts the whole article as maundering.

caShOnlY's picture


Prosperity was restored by massive deficit spending.

I beg to differ.  Prosperity was in fact restored through "productivity" and NOT deficit spending alone.  Deficit spending today only winds up in foreign countries: Into the cash register, up to corporate and on to suppliers.  Which is clearly, in itself, an example of the FAILED TRADE POLICIES of the U.S.

Kantbelieveit's picture

Productivity? Are you kidding? What was so productive about making 1,000 B-17 bombers that were scrapped a few years later? WWII production was all about making vast quantities of war junk, with negative productive value. Blowing things up is not productive.

Any doubt about the efficacy of Keynsian stimulus lingering from the New Deal was erased by the vast WWII DEFICIT spending. The primitives here don't want to consider WWII DEFICIT spending as CENTRAL PLANNING because it resulted in America kicking ass, and they love patriotic violence much more than balanced budgets.

post turtle saver's picture

warfare is the economic equivalent of having someone make holes and then others come in behind them to fill them up, then calling it productivity