1

Is it a recession or a contraction?

Confused by math?

Tess Vigeland: So here's a phrase you probably heard this week: Double dip. We're not talking ice cream cones, of course. What it refers to is the idea that instead of coming out of a recession, we are now heading back into one, a second dip in the economy.

But Harvard economics professor Ken Rogoff argues that not only are we not in a double-dip, we were never in a recession to begin with. Welcome to the program.

Ken Rogoff: Thank you so much Tess for having me.

Vigeland: Let's talk about the difference between a recession and a cotnraciton. Because this is what your article was about and I think a lot of folks would think they're the same thing.

Rogoff: Well, a contraction is a much much more severe version of a recession. It's accompanied by a financial crash. You have a recession, they last a year, at most two years. And then, once the recovery starts, six months later, you're back to where you started. Twelve months later, you're perhaps back even at trend, you've made up for lost ground.

Vigeland: And we certainly are not at that point here.

Rogoff: No, no. We don't have to tell anyone we're not. But after a deep financial crisis, this doesn't happen. It takes years. In fact, post-World War II, it takes four and a half years, on average, just to get back to where you started with per capita income. And unemployment can drag out for even longer than that.

Vigeland: So what is it that makes this a contraction? You write that it's really all about debt, deleveraging on a global scale, a national scale and on an individual scale, right?

Rogoff: Well, the defining characteristic of a great contraction is the huge overhang of debt. And frankly, one of the things which has wrong-footed forecasters again and again is that they think it's an ordinary recession, just a bad one. The way maybe you have, instead of a flu, a bad flu. This is like a pneumonia. And not only is it more severe, but the medicine isn't the same. The traditional medicine for recessions doesn't work in quite the same way.

Vigeland: Well, let's talk then about what the appropriate medicine is. Because if you take a look, for example, at the housing situation, what we've had from the government was the first-time home buyer credit for a couple of years. You have had a few programs that have tried to address the foreclosure problem. What will work? And beyond housing, what else needs to happen?

Rogoff: Well, I think housing is front and center, that's really the big build-up and consumer debts been on housing. We had this incredible ebullience, this huge build-up in credit that led to this panic. So I think one of the big question marks that nobody knows the answer to is how far will Americans go? How far will consumers go in building up their balance sheets? And it partly depends on when consumers start to calm down and feel like they can afford to be a little bit more extended.

Vigeland: One of the questions that we've gotten over the last couple of years from folks who do want to deleverage themselves -- a lot of people paying off credit card debt, trying to pay down mortgages -- but then at the same time, they're being told that if they don't spend money, it's gonna hurt the economy. How do they reconcile that?

Rogoff: Well, I think that we need to have people get their finances in order, and that view that we've gotta spend money to help out, that was the first policy approach. We just have to get a shot in the arm, it's gonna get running again. That was a wrong diagnosis. This isn't a typical recession. It's a great contraction, something that has a much longer time frame, slower recovery and you can't just wish it away.

Vigeland: Kenneth Rogoff is a professor of economics at Harvard. Thanks so much for coming in.

Rogoff: My pleasure.

Log in to post1 Comment

Come on, Ken, say it! You have said it in other places. We need inflation to restore some balance between mortgage creditors and debtors. CDO owners will not participate in mortgage writeoffs and moratoria, so inflation is the only hope.

With Generous Support From...