Editor’s note: GPS sits down with Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University, to discuss U.S. political gridlock and the cyber threat to the U.S. economy.
The 112th Congress has been dismissed by many as the ultimate do-nothing Congress. How much is the gridlock in Washington hurting the U.S. economic recovery?
It’s hurting a lot and, unfortunately, a lot of things that need to be done aren’t getting done. For example, I would like to see Congress pass a version of the Simpson-Bowles tax reform proposal. By far the most efficient way to collect more tax revenue would be to drastically reduce exemptions (“tax expenditures”) thereby raising more revenue while keeping marginal tax rates at a reasonable level. With private investment weak, this is a good time for the government to undertake high-return infrastructure projects with a compelling cost-benefit ratio. But the rationale is to improve the long-run growth potential of the economy, not to engage in pure Keynesian stimulus. While I strongly favor instituting a carbon tax, there is some urgency in refocusing our energy program to recognize the huge innovations that are allowing the U.S. to harvest unconventional sources of gas and (secondarily oil) that promise to make the United States far less dependent on imported energy. In principle, our low energy prices could even catalyze a return to the U.S. of some types of manufacturing.
Of course, the Congress has been gridlocked for some time. This gridlock didn’t matter so much during the credit bubble; the economy was growing briskly despite – or perhaps because of – limited government intervention or innovation. But we’ve reached a point where there’s been so little reform for so long that it’s a hindrance to growth. And, in the near term, things only seem to be getting worse, with ugly partisanship clearing out the center in both major parties.
You wrote earlier this month about the danger a cyber attack could pose to the U.S. What are your biggest concerns on this issue?
I was intrigued by the parallels between the Wild West like unfettered growth of the internet and the parallel growth of the financial sector before the crisis. Like the financial industry before, the superstructure of the web has potential fragilities that could be hugely consequential, yet thanks in part to industry lobbying, there's only limited regulation. Some of the vulnerabilities are very well understood. For example, it the electricity grid depends on all kinds of software that is vulnerable to viruses, and so far only limited steps have been taken to avoid attack, which might involve a re-enforcing combination of cyber and conventional terrorism. The electric grid is a particularly acute vulnerability because if someone takes that down, communications are hit along a huge array of vital services, for example water pumps.
Unfortunately, we are sometimes too reluctant to regulate fast growing industries for fear of throwing out the baby with the bathwater. This is perhaps the right approach for nascent industries but becomes dangerous once they achieve critical mass so that any collapse is effectively systemic.
Of course, there are multiple federal task forces working on this, but at the same time, my strong impression is that we are barely at the stage of acknowledging the depth of the problem, much less undertaking effective solutions. One approach involves redundancies in the system to better protect them against this problem, but of course that involves investments and potentially higher costs for consumers. Such expenses might seem difficult to justify in a sustained downturn such as we are now experiencing, but these investments cannot be deferred.
A few years back, you wrote a book titled This Time it’s Different: Eight Centuries of Financial Folly. Have we learned anything this time around?
The first thing to say is that the latest financial crisis has been remarkably similar to past, deep post-war financial crises that Carmen Reinhart and I studied in our 2009 book. Of course, this time, it has been concentrated in advanced countries to a degree that that hasn’t been seen since the Great Depression.
One key lesson from past crises is that because the aftermath of a financial crisis is so long and so painful, it’s important to resist the temptation to seek out quick fixes. Policy needs to keep focused on long-run fundamentals.
Of course, the eurozone is somewhat different because they are experiencing not only a financial crisis, but a profound governance crisis. In some ways, the euro is just a variant of earlier attempts to use a fixed exchange rate to achieve macroeconomic stability. But precisely because the euro is a much harder form of “fix,” the fallout will be even worse if and when if it collapses. No one knows for sure what the ramifications will be, but it surely won’t be pretty. The potential demise of the euro casts a huge cloud of existential uncertainty over the global economy.