The Federal Reserve is clearly in this difficult situation where it needs to express its message more forcefully, because it’s not about how much quantitative easing it does, but the message behind it, says Kenneth Rogoff, an economics professor at Harvard.
So, he certainly welcomes their change towards focusing on final outputs like employment and inflation, though he would have liked to see a little bit looser inflation target because the Fed needs to have inflation targets up to drive investments, he noted.
But the latest development (of explicitly tying unemployment rate to inflation rate) is certainly a welcome change and the evolution process is likely to continue, he added.
Asked if the economy needs any stimulus, either from the Fed or the Congress, Ken said the economy can’t survive on stimulus forever. But withdrawing it too rapidly in a fragile economy makes no sense, and the right plan would be to gradually tighten the monetary policy over a long period, he noted. But the real problem is that the system is so paralyzed that it isn’t being able to be creative.
The private sector has been creative, but the government sector is just paralyzed. For instance, the tax system needs to be reformed. There are various segments, such as infrastructure and education-improvement, where the money could be spent. There are other areas, like entitlements, which need to be reigned in. There is a very static situation where everyone wants to keep what they have (maintaining the status quo) in a very dynamic world which is not very healthy, he observed.
Asked to define President Obama’s strategy about the fiscal-cliff negotiations, Ken said the White House wants to raise taxes on the wealthy a couple of times before going to people with suggestions for entitlement cuts and proposals for tax-hikes for the middle class, trying to convince them of private sector participation since the government has already done its bit.
But as long as there is this politically low hanging fruit (of raising taxes on the wealthy), it’s difficult to move ahead more broadly, he noted. The Republicans, on the other hand, are trying to say that there must be longer-term planning and it will be stupid not to cut entitlements because the math simply doesn’t add up, he observed. You can watch the video here.