Rogoff Compares Japanese, U.S., and European Financial Crises

Kenneth Rogoff is one of the nation's foremost scholars on financial crisis. With Carmen Reinhart, he coauthored the popular and widely cited book "This Time is Different: Eight Centuries of Financial Folly." Rogoff has the talent of engaging in politically charged economic debate without partisan rancor.  Rogoff compares the ongoing financial crises in the United States and Europe to the crisis in Japan that evolved into the "lost decade" in "An Age of Diminished Expectations?"  The article is short and well worth the time to read highlighting similarities and many differences between the economies as they entered their financial crises.  I have focused on paragraphs that describe policies that might help the United States exit the Great Recession and resume more robust growth. 

As the United States and European economies continue to struggle, there is rising concern that they face a Japanese-style “lost decade.” Unfortunately, far too much discussion has centered on what governments can do to stimulate demand through budget deficits and monetary policy. These are key issues in the short term, but, as every economist knows, long-run economic growth is determined mainly by improving productivity...

In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese-style deflation, which would only exacerbate debt problems by lowering incomes relative to debts. In fact, as I argued at the outset of the crisis, it would be far better to have two or three years of mildly elevated inflation, deflating debts across the board, especially if the political, legal, and regulatory systems remain somewhat paralyzed in achieving the necessary write-downs.

With credit markets impaired, further quantitative easing may still be needed. As for fiscal policy, it is already in high gear and needs gradual tightening over several years, lest already troubling government-debt levels deteriorate even faster. Those who believe – often with quasi-religious conviction – that we need even more Keynesian fiscal stimulus, and should ignore government debt, seem to me to be panicking.

Last but not least, however, it is important to try to preserve dynamism in the US and European economies through productivity-enhancing measures – for example, by being vigilant about anti-trust policy, and by streamlining and simplifying tax systems.