Economic Recovery: What the Economists Say

You wouldn't expect practitioners of the dismal science to be so pumped up. But with the financial and economic crisis dominating the news, the economists attending this year's annual meeting of the American Economic Assn. in San Francisco were charged with renewed purpose. "This is a great moment for economists," Yale University's Robert J. Shiller told a standing-room-only crowd on Jan. 3, the first day of the conference. "Suddenly, it's interesting." Earlier that same day, speaking to a packed ballroom at lunch, Kenneth Rogoff of Harvard University predicted that "this event will be what the Great Depression was to a generation of economists"—that is, their time to shine.

But don't confuse energy with optimism. A featured speaker the first day, Rogoff set the tone for the three-day conclave. His message was a gloomy one: We've got a lot further down to go. He compared the U.S. crisis to other big financial cataclysms, among them the Nordic banking crises of the early 1990s and the Asian crisis of 1997-98, and suggested we are following much the same path. In each of these, the devastation was enormous, with home prices, adjusted for inflation, dropping by an average of 35% over the stretch of the downturn, and the unemployment rate rising by an average of 7 percentage points over the period.

As the conference progressed, there was mostly agreement on the need for massive fiscal stimulus. Beyond that, there were plenty of diverging views about the causes of the malady and the possible remedies. At one panel, Alan S. Blinder of Princeton University rattled off a long list of villains, including the compensation schemes at Wall Street firms that rewarded too much risk-taking, the boards of directors of those firms, and credit-rating agencies. Robert E. Hall of Stanford University added in the oil shock as a possible cause. But Rogoff didn't let the economics profession off the hook. "Everyone wants to blame someone else," he said. "We economists have to turn and look at ourselves." During his lunchtime presentation, Rogoff even went so far as to put up a slide with a long list of papers by economists who missed the early signs of a slump or argued that the credit bubble was sustainable.

Some of the most interesting policy prescriptions came out of a panel with five Nobel prize-winning economists, titled "Where is the World Economy Headed?" To stoke U.S. demand, Columbia University's Robert Mundell, who won the prize in 1999, proposed the government hand out to consumers a half-trillion dollars' worth of spending vouchers that have to be used within three months. "It would be a tremendous boost to the economy," he said.

By contrast, 2006 Nobel laureate Edmund Phelps, also of Columbia, argued that stimulating household consumption was not the best remedy for the financial crisis. "Weren't we all saying that households are overconsuming?" he asked. Instead, Phelps argued for the federal government to spend heavily on upgrades to the nation's infrastructure. In addition, he said, the government should pass an investment tax credit, reduce the corporate income tax, and cut payroll taxes on low-wage jobs.

Were there any points of light? IMF Chief Economist Olivier Blanchard argued that with the right policies, "within a year we will have turned the corner." But Rogoff was more pessimistic: At lunch on the first day he predicted that "what we will see next is a wave of sovereign defaults." He also pointed out that government debt historically increases by 86% in a crisis, in real terms. If the U.S. follows the same pattern, that would mean roughly $6 trillion in budget deficits over the next three years as tax revenues drop and government spending rises. Welcome to Washington, Mr. Obama.

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