Kenneth Rogoff: Secular Stagnation or Post Financial Crisis Trauma?
At the 15th Annual World Knowledge Forum, Kenneth Rogoff, the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University, expressed confidence that the current global financial crisis is not an instance of secular stagnation, but rather a typical trend of post-financial crisis trauma that has occurred for the past 800 years.
In response to the growing public concern that economic growth is slowing down in a way that will cause a train wreck of problems in the future, Mr. Rogoff sais, “The idea that we’re in some kind of permanent growth trap is very misleading.”
Increased pessimism amongst the public, particularly in the idea that the middle class is no better off than 25 years ago and that capitalism is not working, is something that Mr. Rogoff takes issue with.
“Capitalism is not only working,” he said, “but this has been the best three decades in its history.”
Although some economists have stated that the current issue lies in secular stagnation, or sustained lack of demand, Mr. Rogoff believes this mischaracterizes several important elements. While these economists use statistics of real interest rates dropping significantly as evidence of a failing economy, Mr. Rogoff stressed that a graph taken from the same time period showing high stock market rates could just as easily be used to prove the opposite.
Without using multiple approaches and weighing multiple variables, Mr. Rogoff said, these economists are not able to get the full picture.
“Some people seem to think they have the model of the world that is the correct one,” he said. “I think it’s wildly premature to say that [the crisis is] secular stagnation.”
Mr. Rogoff went further to criticize European governments in particular.
“[They are] putting enormous pressure on their banks to hold European assets… obviously that’s not good for risk sharing,” he said.
In contrast, he praised China for recovering from debt, citing the sharp rise in the country’s credit rate as a concrete example becoming a stronger world power. Mr. Rogoff predicted that China will eventually surpass the US as a superpower, adding that the Chinese Renminbi has the potential to become the reserve currency.
Mr. Rogoff showed concern for the state of the South Korean economy. Despite having a good number of large firms that are competitive in the international sphere, he said, there is a lack in competition among the smaller parts of the economy. He added that it is much less dynamic than is seen in other advanced economies worldwide.
Due to high levels of regulation and risk, there are difficulties in starting new firms, which hinders new businesses from emerging into the market. This is an issue, according to Mr. Rogoff, because emerging markets have been a source of global growth.
Even with these concerns, Mr. Rogoff stated that this is a time of accelerated innovation, not fading innovation. He showed optimism for the economy as a whole.
“After you experience the systemic financial crisis, it is very typical to have growth be low for a very long time,” he said. “We’re still well within the time frame of a typical post financial crisis. When historians look back, they will view this as a period of abundance.”
