00:00: Charlie Rose: on January 1st, when automatic spending cuts and tax increases are set to take hold. There is growing optimism on Capitol Hill that a deal could come soon. Yesterday President Obama said he would be willing to lower his revenue goal and start tax rate increases at $400,000 instead of $250,000 per household. Today House Speaker John Boehner said he had developed a backup plan to avert year-end tax increases if his negotiations with President Obama stalled. This all occurs amidst the backdrop over a domestic economy that is (INAUDIBLE) on the heels of better than anticipated housing and employment data. The global economy continues to remain fragile with the European debt crisis and China's growth forecast both in focus. Joining me now from Cambridge Massachusetts Ken Rogoff; he is a professor of public policy and economics at Harvard. He is the co-author of the bestselling book, "This Time is Different: Eight Centuries of Financial Folly". Many consider it to be the authoritative text on the impact of financial crises around the world. I am pleased to have Ken Rogoff back on this program. Welcome.
01:07: Ken Rogoff: Thank you, Charlie.
01:09: Charlie Rose: Let me start big, if I may. So I mean, how do you see as we enter a new year the global economy?
01:16: Ken Rogoff: Well, to state the obvious, everybody is growing more slowly than they would like to, if at all. Europe is basically flat, the U.S. is improving but it's not exactly galloping. And you know, we're entering probably a weak quarter where people are hoping it will be stronger over the course of the year. China is slowing some. And in general all of the emerging markets are slower than they were most of them. India has slowed dramatically, Brazil slowed. So yes, indeed it's a fragile situation. When the U.S. is one of the bright spots, you know, eking out maybe two percent growth, one percent growth this quarter, you know things aren't very good.
01:56: Charlie Rose: And do you expect to see, speaking of the United States, growth rate getting back up close to four percent?
02:01: Ken Rogoff: Well, you know, it's in the realm of possibility, but I think the trend growth rate, you know, is going to be more on the order of two and a half and I mean some days some quarters it will be worse than that, some quarters it will be better than that. There are many private forecasters calling for it to be three percent by year's end, I think we are doing pretty well if that happens.
02:24: Charlie Rose: If we get to three that's good?
02:26: Ken Rogoff: Yes. I think I would be pretty happy with getting to three; it's not going to solve our unemployment problems, any time soon. We really need four percent, five percent growth for a sustained period to really steam out of this, but it does help stabilize the situation and gives modest improvement.
02:45: Charlie Rose: Were you pleased to see the Fed focus on unemployment and jobs?
02:51: Ken Rogoff: Yes, absolutely. I mean, I think the Fed is in this difficult situation where it clearly needs to express its message more forcefully, because it's not just about, you know, how much quantitative easing it does, but about the message behind it. So I certainly have welcomed their change towards focusing on final output, on employment and inflation. I would have liked to see a little bit looser inflation targets because I think realistically they need to get inflation expectations up to help drive investment, but this is definitely a welcome change. I think we're still in an evolution. I think there is more to come.
03:34: Charlie Rose: Does this economy need a stimulus of some kind?
03:36: Ken Rogoff: Well you know --
03:42: Charlie Rose: Whether from the Fed or from the Congress?
03:45: Ken Rogoff: -- I don't think we can live on stimulus forever. Certainly withdrawing it at too rapid a rate in such a fragile economy makes no sense and the plan of sort of gradually tightening policy over a long period is the right one. But then the real problem is just that our system is so paralyzed. It isn't able to be creative. The private sector is creative but the government is just paralyzed. The tax system needs to be reformed. We need to have areas where we spend money like infrastructure and improving education. There are other areas where I think we need to rein in a bit on entitlements. And everyone wants to keep what they have and were in this very static situation in a changing world and it's not a healthy one.
04:30: Charlie Rose: Does it define negotiating tactic for the President to say I agree with on you on entitlements and this is what I will do and therefore you should agree with me on revenue and this is what you should do?
04:40: Ken Rogoff: You know I see the President's strategy -- the long-term strategy is really let's raise taxes on the wealthy, then let's do it again, then let's do it again.
04:47: Charlie Rose: Yes.
04:49: Ken Rogoff: And finally we can go to people and say you know what? This isn't enough we need to cut entitlements. We need to raise taxes on the middle class. We have to have the private sector do some things that the government sector is doing now. We have to have changes. But as long as there are this politically low-hanging fruit, it's really hard to move ahead more broadly. And the Republicans on the other hand, you know, are trying to say, well, we really have got to look at the longer term here. You've got to be kidding that you're not going to cut entitlements. The math just doesn't add up.
05:22: Charlie Rose: Is the debt the problem that there is some disagreement? Your colleague Paul Krugman writing in the column, every other column in "The New York Times" says it's not about the debt, it's not about the debt. Is it about the debt?
05:37: Ken Rogoff: Well, of course it's about the debt. I mean we have record public debt, private debt, internationally and it's not the only thing. I mean clearly we want to leave our children a good infrastructure. We want to leave them improving technology, a good education system, all of the things the earlier generations left us. But on the other hand, if you have a very large debt it creates all kinds of inner generational tensions, distributional tensions. And we are at a level where historically it's been problematic and I think it makes sense to gradually rein it in. I do not advocate anything radical. My co-author, Carmen Reinhardt --
06:16: Charlie Rose: Right.
06:18: Ken Rogoff: -- similarly does not advocate anything radical, but I don't think --
06:22: Charlie Rose: You mean radical meaning -- radical -- by radical you mean some austerity --
06:27: Ken Rogoff: Draconian.
06:28: Charlie Rose: -- yes, draconian austerity.
06:30: Ken Rogoff: Yes.
06:32: Charlie Rose: Yes.
06:33: Ken Rogoff: Draconian austerity. In fact I would welcome more infrastructure spending if it were well spent because you know certainly the United States needs that although I would like to see more private funding of infrastructure and have the private sector gradually take over some of the things on which the government has held a monopoly.
06:53: Charlie Rose: What's the appropriate percentage of GDP and debt?
06:58: Ken Rogoff: Well, appropriate, I mean we are at a level --
07:02: Charlie Rose: What -- what's --
07:05: Ken Rogoff: How about zero?
07:07: Charlie Rose: -- acceptable. What can we live with and what is manageable and sustainable and not an impediment to growth? How is that?
07:19: Ken Rogoff: No one knows for sure, but historically, when you start getting debt levels up at 90 percent and 100 percent of income you are in a very rarefied air. And those debt levels, historically, have been associated with lower growth; not falling off a cliff, not Greece, but lower growth on a sustained basis. You're talking about you know when you get debt up there, it can hold back your growth for decades. There are other things you can do to make up for it, you can have innovation you can have other improvements but it's definitely problematic. You know, you start getting up at levels twice where we are, then I think it gets really dangerous, nobody knows where in between you really fall off a cliff. I think it's hyperbole to say that the United States is going to become Greece --
08:07: Charlie Rose: Yes.
08:09: Ken Rogoff: -- but it's not hyperbole to compare us to Japan and wonder if we get stuck in this slow growth quagmire. Europe might be even more in danger of that.
08:15: Charlie Rose: OK. Let's stop right there. Do you think that we are at risk of getting stuck in the slow growth quagmire that Japan got stuck in - - the United States economy?
08:27: Ken Rogoff: Well, I would say we are in a mild version of it now. And you know we need to do improvements and reforms -- I don't think spending money is the solution. There are smart ways to spend it for sure, but I don't buy this idea that bigger Keynesian stimulus is going to solve our problems -- these fundamental problems with demographics, with slowing innovation, and other things we are experiencing. I think we need more fundamental reform and my colleagues like Paul Krugman and say, well you know, I hear that all the time but I really want to see - - I want to see stimulus now. And I think we have been doing this for a long time. We are doing it at seven percent of GDP at the moment and I think it's sensible to try to slowly rein it in.
09:11: Charlie Rose: So what's -- what should be the percentage of spending to GDP?
09:17: Ken Rogoff: OK. Well, clearly it depends -- are you paying for education?
09:22: Charlie Rose: Right.
09:25: Ken Rogoff: Are you paying for healthcare? You can't compare the United States and Europe because we privately buy a lot of things that they do publicly. You know, over time -- this may sound very theoretical but it's very important -- over time, the things the government provides, very service intensive, they're always going to keep getting more expensive. And I think we need to think about bringing the private sector in, into our infrastructure, maybe more into education, other areas where it brings in money, brings in innovation. I don't think we can live in a world where the government does everything that it does today. We need regulation; you can't just turn over things to the private sector. But you know, if we don't do that, then the costs are just going to rise inexorably. You can be a conservative and say I don't want a large government but it's going to grow anyway. You need to try to decide what the government has to provide versus what it tries to regulate. And you know we're actually on the pretty healthy side of that, compared to a place like France where government spending is more than half of GDP. But it's going to keep creeping up and I think we need to be creative and alert to that.
10:35: Charlie Rose: I want to talk about what's going on in Washington now between the President and the Speaker, but if we -- if they fail completely and we go over this fiscal cliff what are the repercussions?
10:49: Ken Rogoff: You know, I mean there is really a fair chance that they don't come to an agreement for whatever reason the House Republicans won't support it and we go into 2013. I don't think that, per se, would be the end of the world because I think there would be a hue and cry. It would get reined in after a few weeks and they'd settle on something. I would view this, Charlie, as a skirmish in a bigger war where you're growing entitlements, government services are getting more expensive. People are going to pay more and get less and I think it's a very, very difficult tension of how to deal with that and this is just a first stage of that or one of many stages. So I don't think they are going to settle everything. I do hope they come to an agreement. I certainly hope we don't see another debt ceiling fiasco --
11:42: Charlie Rose: Right.
11:43: Ken Rogoff: -- having the U.S. default on its debt, even technically would be pretty ugly.
11:49: Charlie Rose: What would be a reasonable agreement in your eyes?
11:53: Ken Rogoff: Well, I mean almost any agreement would be better than nothing at the moment.
11:58: Charlie Rose: Right.
12:00: Ken Rogoff: I am somewhat facetious.
12:02: Charlie Rose: OK but let's assume -- let's assume --
12:05: Ken Rogoff: But -- I would like to see some bigger problem tackled. First of all if everyone admits that you can't have an absolute. The Republicans say, OK, maybe taxes do have to go up some time; the President says, maybe entitlements do have to get cut. I think that's very important. I clearly -- there are areas of our tax system which are egregious in terms of their inequality implications, things like carried interest.
12:28: Charlie Rose: Right.
12:30: Ken Rogoff: But of course, you know, I would like to see a bigger plan. I would like to see reform that seems to be just a dream at the moment.
12:38: Charlie Rose: What would be reasonable for the President to agree to? If, in fact, you know, the rates are back to Clinton levels and it applies to people who make in a household more than $400,000?
12:50: Ken Rogoff: Well, I think he pretty clearly has to get something significant here. He campaigned on it, he is held fast; if he gives in on this completely what happens to the next disagreement, you know, you just can't fold your cards.
13:01: Charlie Rose: But that's on the rate -- that's on the rate side. What should he get -- that's on the rate side what should he get on the entitlement spending cuts?
13:08: Ken Rogoff: Well, I think there are obvious things like you know raising the age of Social Security.
13:14: Charlie Rose: That's good.
13:16: Ken Rogoff: Having people with very high incomes, you know, not receive -- get the same benefits from Medicare and Social Security. There are plenty of adjustments that could be made for the relatively small amount that they're talking about in the larger scheme of things here, you know, looking at the 10 and 20 year horizon they are talking about.
13:37: Charlie Rose: When you look at this financial crisis that we saw in 2008 and you look at historical data that you so brilliantly covered, when do we come it of this and how does this fit in terms of the data that you saw from previous crises?
13:54: Ken Rogoff: Well, it's been very on track to the average of post-war crises down to the fact that housing is picking up again. You know, typically after five or six years, housing prices stabilize and start to rise, but it takes a long time for employment to come back fully. This is something where, you know, it could -- it could certainly take another five or six years to feel normal and going at the pace we are going at it could take longer than that. But you know, I wouldn't necessarily say another crisis around the corner unless that we're in Europe or Japan.
14:30: Charlie Rose: Did you see this crisis coming in 2007 and 2008?
14:33: Ken Rogoff: You mean did I short housing?
14:35: Charlie Rose: Whatever you might have done? Yes, yes, yes, yes. Get all of your sub primes out of your portfolio?
14:43: Ken Rogoff: I think it's fair to say that Carmen Reinhardt and I realized there would be a lot more crises over time when we started our project in 2002 --
14:52: Charlie Rose: Yes.
14:55: Ken Rogoff: In 2003. But as the crises began to unfold in 2007, we wrote a paper showing that looking at indicators like what was happening to housing prices, what was happening to the trade balance, and a number of other macro indicators, the U.S. was looking very, very vulnerable. But it's very hard to just say, you know, I know it's going to happen this minute, the nature of these things. You're watching it unfold before you, little decisions which are seemingly innocuous make a big difference. But I think the fact that something had to give with this bubble I think I had started writing about that in the early 2000s.
15:33: Charlie Rose: So my question is, how will we know when the next crisis is coming?
15:40: Ken Rogoff: Well, you know, certainly one indicator is looking at credit bubbles. There is a lot of evidence for that.
15:46: Charlie Rose: Yes.
15:48: Ken Rogoff: And I think central banks need to go back to looking a lot harder at what's happened to credit throughout the cycle. It's a -- it's an indicator that sort of got cast by the wayside with this focus on the money supply and credit is very important and you have to keep an eye on that and you know, that would certainly have been the number one thing, housing bubbles are another leading indicator and we are in no danger of that at the moment.
16:11: Charlie Rose: Right.
16:13: Ken Rogoff: But there are some indicators. And, you know, nothing is perfect like you went back to Paul Krugman saying well I don't think we have too much debt and maybe he is right, right now and but it's certainly the case that, you know, if you keep on the path we are on, eventually we will have too much debt. And it's hard to know exactly the timing.
16:32: Charlie Rose: Let me just go back to the plan in terms of the debate that's going on at the White House between the Speaker and the President. The latest plan from the President would raise $1.2 trillion in taxes in the next decade. And it would cut $1.22 trillion in spending. Doesn't the ratio have to be about like one for every $1 increase in revenue there's got to be a $3 cut in spending? Isn't that a more appropriate relationship?
16:59: Ken Rogoff: It certainly -- it certainly is the case that tax hikes hurt growth proportionately more in most cases and you know, there are exceptions, but I think I would be concerned about having it overly weighted toward tax hikes but there are other considers here.
17:17: Charlie Rose: But is one to one not the right relationship?
17:20: Ken Rogoff: There is no scientific number here. We are talking about a move along a bigger path that's going to get adjusted 20 times. And we did have the Bush tax cuts, which was certainly the proximate reason you know beyond the financial crisis that the whole thing became so unstable. It's -- it's the entitlements that you need to look at. That's where the numbers really go crazy when you start getting out eight and ten years out when the numbers blow up. That is the thing where people are really concerned. And the general principle is if you are facing that, you know, you want to try to adjust to it gradually because politically it's very difficult, but I don't think there is some magic number here.
18:03: Charlie Rose: OK.
18:05: Ken Rogoff: Both sides can legitimately hold out for whatever they want.
18:09: Charlie Rose: OK. But I am trying to get a fix on what -- what's reasonable when the contours of within we ought to expect and how do you measure reasonableness?
18:21: Ken Rogoff: Well, I really do think it's not so much the total revenue from tax cuts as the President needs and wants to raise taxes on the wealthy and probably should be looking at the ultra wealthy too, because that's just the first move towards raising it on everybody else. Our spending on goods and services just isn't that much. I mean, cutting defense right now saying we are pulling out of Afghanistan, we can cut defense. That seems awfully unlikely in a world where emerging markets are spending more and more on defense, where the issues are getting bigger. Our government's spending on goods and services just isn't that big; there isn't that much room to cut things. There are some. I think there is room to substitute, but it's really in the entitlements, medical care, and to much lesser extent Social Security, that's what you have to look at. And you know that's really -- if you get that straight, then the other things you can sort of tweak at the margin much more. And I would like to see more infrastructure spending. I would like to see spending on research and development, education. I mean, you have to keep, yo know, moving ahead with our country. You can't just stand still.
19:34: Charlie Rose: Could the President go to the country and say just what you just said and -- and find a willing within the economic community, the financial community, the markets -- the markets around the world, if he made that clearly a plan that we need to spend more and investment ideas and to contribute to the economic growth and yet at the same time we have to match that with the kind of entitlement cuts that are clearly necessary because as someone once said you know you go hunting where the ducks are?
20:03: Ken Rogoff: I think economists and markets would be thrilled to hear that, as long as it were tempered by saying you know we need to make sure we're not spending too much on the infrastructure.
20:14: Charlie Rose: Right.
20:17: Ken Rogoff: -- we are going to try to improve everything. I think people would be thrilled to hear it. The problem, is we have this paralysis that we start with at the beginning.
20:24: Charlie Rose: Right.
20:26: Ken Rogoff: This incredible political paralysis, you know. We see it with gun control laws, everything, and I think it is very hard to make this kind of rational approach. Look at the Simpson-Bowles, great idea and yet it got thrown out by both sides, their tax reform plan.
20:41: Charlie Rose: Yes so Simpson-Bowles would have been a perfect starting point as you see it.
20:46: Ken Rogoff: We would be in a lot better -- we would be in a lot better place today if we had adopted that because it shows sensible compromises. I mean it's not the ideal theoretical plan where we would be talking about a consumption tax, a gas tax, the energy tax, all kinds of things, but within the political reality, it was a very bold and sensible plan that impressed economists across the political spectrum. But you know, so far it hasn't really had much traction, even though of course the President says he supported it in the debates so did Governor Romney, but it's clear there's a lot of political opposition.
21:23: Charlie Rose: And clearly they did not fully support it when it was first announced?
21:30: Ken Rogoff: That is absolutely true.
21:32: Charlie Rose: As you look ahead to 2013, what will you be looking at? What economic indicators? Obviously the unemployment rate. What else?
21:44: Ken Rogoff: Well, I mean, I'm fascinated to watch what's happening in Europe, where right now, Europe is quiet and all the action is in the United States. My European friends, policy friends are thrilled that they are not on TV in the United States, that everybody is worried about the fiscal cliff. But Europe is still a mess, I mean Governor, of the Central Bank Governor Mario Draghi sort of said let there be money and that's provided liquidity and protection but it hasn't provided, you know, the fundamental change in Europe. That still, you know, is simmering beneath the surface. I think in the United States, this immediate political shenanigan will get cleaned up, the fiscal cliff. But what I worry is that we won't see a big reform and that's really you know what I -- what I would like to see. We can look across to China also, there is a change in leadership. Their economy is stabilized but you talk about bubbles, there is a lot of signs of them in China. And you can say that, you know, it is nothing, they will still grow but there -- there are plenty of concerns around the world. I am hopeful the United States will stabilize, housing will continue to strengthen, employment will stabilize, but I don't expect galloping growth.
22:56: Charlie Rose: Ken thank you so much, it's a pleasure to have you on the program this evening.
22:59: Ken Rogoff: Thank you, Charlie.
23:01: Charlie Rose: Ken Rogoff from Harvard. Back in a moment. Stay with us.