No convincing economic arguments against further stimulus spending
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Of course, Japan's debt that is held by the public is also held mostly by domestic investors. So this part of Rogoff's argument is really making the case for avoiding the chronic trade deficits that the United States has run for decades. It is the overvalued dollar, and the resulting trade deficits, that drive foreign borrowing in the United States.
As for the warnings about what might happen when savings and the labor force shrink, we have heard this rhetoric for decades from deficit hawks in the United States and Europe. Suffice it to say that there are many options open to rich countries should they ever face the problem of a "labor shortage." But unfortunately our problem for the foreseeable future is the opposite. It is a shortage of jobs, not labor.
Rogoff cites his own work, with Carmen Reinhart, in arguing that debt-to-GDP ratios of more than 100 percent are "above the threshold where growth might be affected." But their paper really doesn't show much at all, especially for economies like the United States and the Eurozone that can borrow in their own currencies. Countries that end up with debt greater than 100 percent of GDP are likely to have other problems that got them there. As others have also noted, without controlling for these other factors - which this paper decidedly does not do - there is no way of establishing causality. In fact, the authors do not even control for changes in population growth, since they look only at GDP growth rather than per capita GDP.
Rogoff adds another self-defeating argument: "Importantly, governments that emphasize long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions."
In other words, he is saying that central banks might react to expansionary fiscal policy in the present situation by tightening monetary policy. But this just means that the central bank should be subordinated to national economic policy, instead of the other way around. He is taking for granted that central banks must be "independent." But as experience has demonstrated - e.g. the US Federal Reserve somehow missed the two biggest asset bubbles in world history - this doesn't necessarily mean independent of Wall Street, it means independent of the public interest. So yes, a government that wants to use expansionary fiscal policy will need the cooperation of its central bank. And should have it.
Rogoff argues that "anemic growth with sustained high unemployment is par for the course in post-financial-crisis recoveries." Par for whose course? If past governments made stupid mistakes and/or didn't care about condemning a generation of low-income young people to years of unemployment, does that mean we should do the same? At the end of the day, Rogoff provides no convincing economic argument why either the United States or Europe cannot, or should not, finance the necessary stimulus until unemployment approaches more normal levels.
(This article was published by The Guardian Unlimited (UK) on July 26, 2010.)
