[OPE] Prof. Rogoff on Post-Keynesian austerity

History will rue US and Europe debt woes
By Kenneth Rogoff

FT April 4 2011

(...) Even if today's government bonds seem pristine by the standards of
pre-revolutionary France, future scholars will see our tax systems as
Byzantine labyrinths funnelling money to powerful interests, creating
staggering inefficiencies. They will surely be incredulous to see pensions
and health insurance financed via Ponzi schemes as transparently
unsustainable as the 1700s South Sea bubble. And will they believe that,
back in the 21st century, there was no mechanism for putting insolvent
financial institutions into bankruptcy?

According to my recent research with Carmen Reinhart, debt-to-income ratios
are already at, or near, postwar highs across advanced economies. Many are
close to the roughly 90 per cent debt-to-income threshold which,
historically, begins to be associated with lower growth. And this does not
account for the adverse demographic trends or hidden debts that inevitably
jump on to the books when a crisis unfolds.

Unusually low interest rates currently keep the carrying costs of these
debts modest, and make it seem as if the day of reckoning is far off. Sadly,
debt can be worked off only slowly, while rates can rise suddenly. Such a
rise, if sustained, would be extremely painful for the national budgets of
many countries, including those struggling in Europe. (...)

Simplifying tax systems, stripping away tax expenditures (a device the
French kings would have admired), and lowering marginal rates are vital.
Entitlement growth must be contained. Long-term productivity can be enhanced
by improving education. The potential gains from applying technology and
private competition are also staggering, especially if public education is
rightly construed to include libraries, the internet and public media.

At the core of contemporary financial crises, however, are financial systems
that remain primitive relative to classroom constructs of perfect markets.
The lesson from the financial crisis is that we must become less reliant on
crude, non-indexed debt. More sophisticated instruments indexed to measures
of economic performance (such as those proposed by Yale's Robert Shiller)
are an idea, though these may also need strong independent fiscal councils
to monitor government data claims. (...)

http://www.ft.com/cms/s/0/1399efba-5eea-11e0-a2d7-00144feab49a.html#axzz1IfljApa8

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Received on Tue Apr 5 14:17:19 2011