Rogoff's "second great contraction" and why I'm mad as hell at Washington
Sunday, August 7, 2011 at 11:26AM 
Got this by way of Thomas Friedman's Sunday NYT column, which is pretty good (for a blog post!), but the direct source approach is much better. Still, Friedman's upcoming book on fixing America couldn't be better timed, so expect another mega-bestseller there.
Rogoff's point is simple but very revealing: we've all known this crisis to be a financial one versus the usual biz cycle. Recovering from biz-cycle contractions is historically a quick affair, but recovering from a financial crisis is typically more the 5-7 years horizontal scenario. Rogoff's key insight is to state the obvious (for most of us consumers): the "recovery" of the business cycle has already arrived and it changed nothing for most people, because the hangover is a long-term credit contraction - i.e., the huge deleveraging.
Many commentators have argued that fiscal stimulus has largely failed not because it was misguided but because it was not large enough to fight a “great recession.” But in a “great contraction,” problem No. 1 is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.
Governments, for example, could facilitate the writedown of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries. For instance, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one actually big enough to work), in exchange for higher payments in 10 to 15 years if Greek growth outperforms.
Is there any alternative to years of political gyrations and indecision?
I have argued that the only practical way to shorten the coming period of deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4 per cent to 6 per cent for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, as Europe is painfully learning.
I feel this personally in spades: built a nice big house in 05-06 at the height of the bubble (of course, I walked away from the old house with an inflated sum, so no complaints), so the house is priced in that way - as is my mortgage. At the time, no problem, because I'm getting paid in a bubblicious way.
Then the crisis. All of a sudden everyone says my labor is worth a whole lot less. Still love me and the work, just want to pay a lot less. Everybody is doing this, except my mortgage holder. He wants that to stay the same.
I'm lucky. Despite losing a ton of income over the past three years, I've scrambled and replaced the vast majority. I have to work three times as hard for 5 times as many customers, but I'm managing because I'm not reliant on any one job and I'm willing to hustle.
So I do the right thing and don't strategically default on a mortgage, which is tempting, not because I can't pay it because I can - and am. It's tempting because, geez, why should I pay off this debt honorably across this long crunch while so many others get help or simply run away? Because when I do, I subsidize all their behavior. If I strategically default, I suffer some serious inconveniences, but I can put us in a rental tomorrow for a fraction of what I'm paying on my mortgage. You hear these tales all the time, but usually from couples with few or no kids, because making that sort of move would be a mega-bitch for a family of 8.
But I built a big house (six kids, go figure) and I'm above the usual government help parameters, so - again - I do the right thing but feel mightily screwed by the turn of events. I keep wondering, where's my haircut - you know, the one everybody else seems to be receiving?
Worse, I have a White House that claims I'm the problem because I don't pay enough taxes and so it wants to soak me because that's an evil state of affairs. Funny thing is, I pay the Fed a whopping sum every year - about three times as much as my dad ever made in a year while he supported us seven kids. So naturally, when more than one out of every three dollars I make goes to the government, I feel like I'm supporting all sorts of programs for the needy, plus I'm doing the right thing by the mortgage, plus I keep up my charity donations, plus I pay 3 private grade school tuitions (saving the public schools) and two public college tuitions (eldest daughter and wife). I don't ask for any hand-outs from the government. Hell, I fund them and am glad to do so. But then I'm told I'm the reason why the government is so in debt (not enough taxes from the "rich") and yet I'm the dupe who continues honoring that mortgage from another era while paying for the bail-outs of those who can't. And you know, I don't feel like I'm the problem - or evil for doing all that.
In short, I'm doing everything I can to help this economy. I'm working my ass off, I'm honoring all long-term debts and keeping myself out of any short-term credit. But you know what that takes in this economy? It means I am as stingy as possible on consumer spending. It means I put off business investments for as long as possible. It means I've got nothing for venturing investments. It means I'm more incentivized than ever to stuff as much into retirement funds to avoid the tax man. It means I will vote for anybody who seems to spell reasonable restraint and relief - and that sure as s--t ain't Obama.
I'm not a Tea Partier. I'm very middle-of-the-road: a conservative Democrat on domestic and a liberal Republican on foreign. I crave compromises in Washington because our political elite's inability to make those deals happen reasonably means I compromise across the board. They do nothing to lift the economy out of its doldrums and I reciprocate. Everything I read from them says, "Screw you" and I can't help wishing them the same.
There's your national angst in a nutshell. I've been laid off. I've had my salary cut plenty of times. I've been asked to work twice as much for half as much money. I've seen hours slashed. I've had to arrange my own health insurance for the first time in my career. Moreover, virtually every risk I once shared with employers has, over the years, shifted to me as an individual. As somebody who studies globalization, I've learned to accept that tough reality, because the economic models we relied upon before globalization went big time are now unsustainable. I don't regret that transformation, because it's part of the globalization process that's lifted hundreds of millions out of poverty globally. But it does mean this country needs to retool most of how it's dealt with economic "losers" and those made vulnerable by these changes. But Washington seems clueless in this regard, with everybody holding firm when a bit more imagination is needed (my column tomorrow).
So yeah, as a small businessman (Barnett Consulting), I've had it all across my various endeavors across this Second Great Contraction - sometimes voluntarily but oftentimes not. Everybody has had to tightened up dramatically - that's the basic inescapable reality in this business environment.
Yes, I've been lucky because I never had all my eggs in any one basket, but I survive only because I've refused to lay down. I lose one job (and I've lost several since 2008), I go out and immediately get two or three more - because that's the terrible math.
So - again- I do the right thing. I honor all my obligations and simply work that much harder. But no, I have no optimism about the future of our economy right now. I don't how I could. I know what I know about globalization and America's long-term strengths, but I look at Washington and I see clueless politicians with no business experience spending all their time trying to tear each other down and I wonder why I must suffer these fools.
I don't have any choice. We made the "mistake" of having three kids. We made the "mistake" of adopting three needy kids from around the world (there are worse ways to spend your money, but it's essentially my helping the world without the same tax breaks as when I give to international charity X). I built that nice house (which I love, BTW) in a nice school district (so I don't pay tuition to my son's excellent public HS, which I support with property taxes, even as I privately fund his show choir's appearance at the London Olympics next summer because that's what excellent public HS's do - damn it!). Frankly, I am very happy with my family's existence here in Indy, which is a state that's cheap but well run (and yes, I would have liked to see Mitch Daniels run).
But I am plenty angry about the economy and the place it has put me in. I am forced to scramble non-stop. I hustle like a maniac. I am full of angst and it's mostly about debt (what I honor while others do not, and what I work like a demon to avoid, but honestly, what's the value of a stellar credit rating at this point - except to subsidize others?). I pay huge taxes and am denied any haircut-like relief on my mortgage - when everything else I see in this economy has been negotiated downward to account for the new reality (I know, because I've done it myself with all sorts of counterparties).
But most of all, I f--king hate the government right now for being such incompetent boobs. I would be happy to see them all lose in 2012 - and will vote that way.
Reader Comments (19)
Hi Tom,
How does the current economic situation affect the prospects of a new China-U.S. Grand Strategy by "Executive Agreement"?
I thought you might like a view from the other side.
One of our family members was denied live saving cancer surgery because his and Gov Ins wouldn't cover the cost, guess where many family members retirement contributions went? Some have lost their homes, and other older are worried how they will fare with health care cuts, can be a matter of life or death. Some are on food stamps, and looking for ANY job. none can afford private schools
Your discussion indicates your exposure to new tax cuts, so I think that means you make over $250,000 a year. Congratulations you have done well, some families are getting by on less than $20,000 a yr. And can't afford health ins.
And the GOP is talking about the poor caring their share of the burden.
They may be right the poor may be able to carry a heavier load.
But it may cost some their lives.
Belt tightening shouldn't cost lives.
Or kids go hungry cause GOP wants to cut food stamps.
This recession/Depression is hard on everyone.
But is cutting the safety nets for the poor the answer?
The GOP is holding firm on NO taxes, take it out of
the entitlements for the poor.
If this were not a recession/depression maybe I could
go along with cutting entitlements.
But there are so many poor at mortal risk it doesn't seem right
Gerald Anthro
Don't think post made it: repost
We are all stressed out and angry. We cannot control events that affect our lives. Those we have elected to govern and regulate are either incompetent or corrupt or turned into zombies by special interest money. Clearly, the form of government we inherited from the founding fathers is not working for us.
I am seventy years old now and have never before experienced the level of outrage expressed by friends and family at the fools in Washington and the crooks on Wall Street.
These are the conditions that bring forth demagogues.
Ross,
I think it makes the logic more compelling, and I talk about that again in my column tomorrow.
Gerald,
"I don't ask for any hand-outs from the government. Hell, I fund them and am glad to do so."
As always, you seem to be having a conversation with somebody else. Nowhere in the piece do I say, "lower my taxes," or "cut welfare programs." What I ask for is compromise in Washington that improves the economy while I feel like I'm doing everything I can from my current position. I would love a nice flat tax that I could calculate in my head. You tell me it's 50% this year because the world really sucks and I would be happy to pay it. But I'd want it down during a good year.
But just tell me the number and I'd gladly pay, as I have for the past 25 years- never seeking an out and voting Democratic the vast majority of the time.
Your opening bid is that Republicans are evil and ready to ruin the lives of the poor. I get that. But I have plenty of friends who argue the opposite.
What I'd like in the meantime is leadership from the White House to move the ball some. Instead, I'm getting this arrogant, above-it-all, "bumps in the road" mindset that makes me angry enough to complain.
I've also been through the near-bankrupting experience of a cancer fight in my family and it sucked. In fact, it motivated me to always have more than one job/career in the decade and a half since. I'm familiar with the fear; I been running from it since 1994.
Excellent post that articulates the almost universal (82% according to polls); feeling of disgust with the lack of visionary leadership in Washinton. I am totally on board with your idea about a flat tax that would have every swinging D@% paying something however small, so we don't have the resentment of only about half the population paying federal imcome tax while the other half skates. Using the tax code for a weapon in class warfare will eventually lead to the real thing.
Tom, thanks for sharing your personal thoughts which I have watched evolve on your blog for the past several years. I look forward to your column tomorrow and recommend an e-book I recently read: The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, & Will (Eventually) Feel Better by Tyler Cowen...which historically puts in perspective in your style what we all are going through & what we can expect in the future.
I have three kids, two in college (one on scholarship) and another to go. I am 52, doing OK but not rich by any means. I have had companys fall under me, been laid off, worked as an employee, a consultant on both salary and on commission. During those times I have worked in a dump, painted houses, tinned roofs, cleaned hotel bathrooms and empied trash cans. I know a lousy situation when I see it. I started in construction with a shovel and a pile of dirt, rose into supervision and management, learned sales and communication techniques as an insurance agent. I even taught martial arts professionally for two years taking a school from red to black only to have the profits skimmed by my employer. Knocked down over and over, always getting up and always finding a slightly better situation than the one before. I LEARNED FROM THE PAIN. Today my oranizational and communication skills have mde me a major management asset in a large insurers IT Dept. Finally, just close enough to see retirement at maybe 70..., I live in a state that demands a 12 month tax increase be paid in 4 month (but it should only hurt the rich!) And, then when I am burning up over taxs, my congressional representation not only refuses to answer any calls or letters but has the gall to send me a form letter telling me he is doing the great things for me I asked him to... - but wait, I didnt ask him to do anything! No one is listening, no one understands we need to get the whole house in order and that I really dont have any more money to give them. I give the Tea Party credit for starting the argument, because the other side doesnt seem to see any possible reason they shouldnt just keep on borrowing. I agree, they all need to go - there is no perspective in any level of govt. of what the normal citizen wants vs. needs and what reality can actually provide.
There still are some solutions out there that don't require gutting services or hiking taxes. They don't take care of the whole problem but they certainly take care of some of it. 40+ nations have commercialized their versions of the FAA including a number of countries in the 1st world. The general experience has been same to improved safety and service with significantly reduced system costs. It's time to let the FAA take that path.
It frustrates me to no end to see opportunities for budget savings without gutting services and we can't seem to get such no brainers done.
Tom,
Your post makes me feel better that I'm not alone in my disgust at a situation that was completely avoidable and fixable by competent leadership . The most disheartening aspect of the current economic situation is that those of us that believed we were doing the “right thing” (i.e. purchasing a home and not defaulting, investing in retirement, providing a good education for the children) are the ones that typically provide the stability to lead us out of a recession. Instead we are getting “junk punched” by the housing market, employers, Wall Street and the political class. You can only take so much - there will be blood in the next election.
Side note on the strategic defaults: I was in D.C. last week eating dinner at the hotel bar and I couldn’t help but overhear the conversation between two patrons who were not using their “inside voices”. The woman was advising the gentleman to default on his mortgage because it was the “easiest thing she has ever done.” His response, “great, I need to get on that, but first I need to buy the Harley and the place in South Carolina before I default.” Catholic guilt aside, am I a fool for not doing what everyone else seems to have no problem doing?
Good rant. "I'm not a Tea Partier." Having spent a lot of time with real, existing Tea Partiers, not the media myth, you don't sound to much different. I mean that as a compliment to all parties.
Dear Tom,
you are my go-to guy for foreign relations, but I don't think you understand the plight of people like me. You may not be "rich", but I'll bet you make a hell of lot more money than my family.. (And I'm sure that you deserve every bit of it.)
I have multiple health problems & without Medicare would probably die.
I think when people get "rich" they tend to see taxes differently & perhaps lose some of their compassion.
Anyway, I totally disagree with your position on taxes, & your obvious contempt for Obama.
Tom,
Thank you for writing this post. I've been curious to hear what your situation was like given the current economy. I believe it's important to hear the voices of people like you who are willing to invest in our local, regional and national community, while maintaining the spirit of compromise. I've been pessimistic about the future of our economy and government for quite a while lately, like you.
I am still planning on voting for Obama in the next election. I believe that voting "the bums" out may make sense in certain situations and is immensely gratifying (if I see the desired outcome of my vote), but here I believe sticking with Obama is the best course of action. Even if the Republican party fields a seemingly moderate candidate such as Jon Huntsman this upcoming election, I think it would send the wrong message to the Congress. Even if I believe Mr. Huntsman was a better leader and consensus builder, I'm afraid that the message would be interpreted as strictly anti-consensus. This would only further entrench our government in additional bitter standoffs between the most radical wings of both parties.
I want Obama to live up to his election message and I want him to be able to be that force for change to push for the big compromises such as the Gang of Six's economic reform policies and immigration reform. It is my hope that by electing him back to serve a second and final term, that Congress will get the message that these are the compromises that we as a country want.
I've been reading your books, blogs and video interviews for a while now, and I still come away amazed by your insightful analysis. With that said, I will echo the question from the first comment poster and inquire how you see this American economic turmoil will affect our relations with our debt collectors (i.e. the chinese).
Tom,
I don't think you're seeking validation, but today (Monday, 9th), Mr. Market confirmed in spades everything you feel.
Workers of the world unite. Shut down the countries economy for a few days in mass protest. Billions would be lost, and participants would have to sacrifice a lot. The results, however, could be just what this country needs to shock DC out of this rut. The American people are too complacent. Outrage towards DC is not supported by action, and action speaks louder than words. Action doesn't mean blogging or complaining on the internet. That's too easy and doesn't have the same impact even if I really really enjoy my on-line rants. :)
From what I can tell a mixture of conservative and liberal policies is what this country needs. Close the loop holes that everyone keeps promising to fix. Why is GE not spending a dime on taxes? That's just stupid, and is blatantly greedy. This also should apply to any individual who isn't paying their share. Increase taxes on luxury items. If a flat tax works out better, then do that. Close down or rework unnecessary government programs. Shorten the allotted time for unemployment. (I didn't seriously look for work last year till the free money stopped. Now I have a great job that I really enjoy.) Make term limits for both houses of Congress...
Much more can be done, but the politics and special interests really do run this government. This bogs everything down, and really fucks with the masses. No bueno. I've also read the structural changes made over the last 40 years have made it possible for the minority political party to hold everything hostage. This slows down an already lethargic DC.
Finally, I find the increase in the wealth gap to be very disturbing. I may be mistaken, but during the 90's I recall reading that 3% of the population controls 90% of the wealth. Now 1% is controlling 90%. Will the world ever see the classic civilization triangle transformed into a trapezoid?
I'm not an economist but I don't see how no one saw this coming. We had two tax cuts during two wars. If you look at war "in the context of everything else". It's simple math. I remember the basics from PNMap that "open societies" will benefit trade and the economy but that's a pay off in the long run; and as Keynes said, in the long run we're all dead.
How can anyone be surprised by our present fiscal situation? My MBA econ students pegged it almost 25 years ago to the year it would begin. According to the IMF we have about $200 T in net present value of unfunded liabilities. I do not see how we can inflate, grow, or tax our way out of this morass. If someone out there does, please tell us.
As for the ending, I am not optimistic that it will be peaceful. Almost all countties following the Faustian bargain of debt, dependency, and default as a model; and, where the citizens have put their faith in their elected representatives become the final victims as they experience a slow and agonizing ending. It is Ponzi on steroids. And, it is seldom a happy ending, is it? How could it be? Think Greece, Britain, Italy, etc........
This Post should be sent to White House and WSJ.
Politicians, even if they are aware of a needed and emerging economic/social 'transformation,' don't want to take a lead in the discussion process. They know it will be turbulent and can be a long process. The public prefers only short term minor 'changes' within the old system ... for their generation and their kids. Starting to adapt to a real forward transformation will be imperfect, and the public and most politicians will only notice the problems, not the progress.
In the early 1990s the head of NIST sent me a PBS video that answered my question as to why the government was not informing the public how our new technology for parts manufacturing would transfer the work to foreign labor or more automated domestic production. We had pushed our design standards to be the international standards. The NIST director answered the PBS interviewer by finally saying neither political party wanted the new design and manufacturing methods to get more publicity. For almost a decade our textbooks and media kept the process almost invisible. Guess what happened to our workers?
Everyone,
You must present more solutions too. Only 3 million out of 155 million workforce outsourced. Yes, there has been automation on top of that, are you all actively thinking about new industries for manufacture in Biotech, Nanotech or Alt Energy selling to both India, China, Africa and LATAM in addition to the US market?
Manufacturing here needs not only the ingenuity that the world can't invent, also workers that can present ideas, use math as their friend and realize you won't have a 35 year career in one industry, maybe only a 5-10 and have to move to something better. These are young people's problems, I know the baby boomers can hold on and give back for another 15 years instead of constantly worrying that it all comes to an end.
For all predictions of violence, 80% of people are unmoved and the last 20% won't follow through unfortunately, only remain upset and waiting for others to solve their problems.
Derek Bergquist