So how long is this economic slump going to last…

by robekulick

The bad news is that, according to Ken Rogoff, former head of the IMF, Professor Economics at Harvard, and general economics big shot, it could be awhile.

So you don’t have to actually read it, I’m going to crib out the important parts, but here is a link to his recent article on the recession which is based on his academic research with Carmen Reinhart, another econ big shot:

Rogoff explains:

“The aftermath of a typical deep financial crisis is something completely different. As Reinhart and I demonstrated, it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. So far, across a broad range of macroeconomic variables, including output, employment, debt, housing prices, and even equity, our quantitative benchmarks based on previous deep post-war financial crises have proved far more accurate than conventional recession logic.”

Rogoff’s proposed solution to the slump is interesting because its sure to miff people on both sides of the political spectrum.

Contra the Left (represented in econ land by Paul Krugman): Rogoff finds that since the slump was caused by a deep financial crisis which was in turn caused by leverage, further government borrowing to use on economic stimulus will not be an effective cure for our economy’s woes.

Contra the Right (represented in econ land by John Taylor): Rogoff suggests that since heavy indebtedness is what is weighing on the economy, a burst of inflation of around 4-6% per annum for several years is the best cure for our problems.

I have to admit, I didn’t have strong opinions on counter-cyclical macroeconomic policy going into the recession since I’m more of a micro econ guy, but Scott Sumner, Rogoff and a few others have pretty much convinced me that some moderate inflation is what we need now.