This week in Say More, PS talks with Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University.
Project Syndicate: The current disconnect between stock-market valuations and the real economy, you recently explained, is rooted in the fact that “small businesses and individual service proprietors,” rather than publicly traded companies, are bearing the brunt of the COVID-19 crisis. You also noted that, as government support lapses, many “otherwise viable businesses” will fail, “leaving large publicly traded companies with an even stronger market position.” Yet when US President Donald Trump announced that he had ended negotiations with Congress over a new stimulus bill, the stock market immediately soured. Was this a blip, perhaps driven by the realization that large companies, such as airlines, weren’t getting bailed out anytime soon? Or does it suggest that Wall Street and Main Street aren’t so disconnected after all?
Kenneth Rogoff: To be clear, much of the stimulus being doled out today is best described as (badly needed) disaster relief. Government programs, such as extended unemployment relief and direct money transfers, have helped ordinary people, but that does not mean they are bad for the stock market.
Yet stocks have also benefited from many other factors, especially zero interest rates and programs whereby the US Treasury and the Federal Reserve have propped up corporate- and municipal-bond markets in unprecedented fashion. If it proves more difficult to contain COVID-19 than currently hoped, however, we may face a spate of bankruptcies, which would challenge the market’s belief in the government’s willingness to incur large losses to prop it up.
We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Rogoff's picks:
by Anne Case and Angus Deaton
Building on Case and Deaton’s extraordinarily influential research on the mortality resulting from the tragic opioid epidemic in the United States, this book examines three causes of death – drug overdose, suicide, and alcohol-related liver disease – that have risen rapidly since the mid-1990s. It is extraordinarily well written – sweeping yet succinct. And though it was published before the COVID-19 crisis, its critique of the US approach to health care and inequality is remarkably prescient.
by Charles Goodhart and Manoj Pradhan
Surely when historians look back at this epoch, the extraordinary rise of Asia – especially China – will be viewed as the singular economic development (other than environmental destruction and climate change). And, as I have been arguing since 2003, the rise of China – as well as the integration of Eastern Europe into the global economy – likely explains the surprisingly low inflation pressures of the last 25 years. But if one looks at demographic trends, Goodhart and Pradhan argue, the global labor force is set to start shrinking, and the old-age dependency ratio is set to start rising. These trends portend a sharp reversal of today’s benign inflation pressures.
by Judith Warner
Middle school is not exactly top of mind when teaching university students. But the social exclusion and isolation that Warner so eloquently describes unfortunately carry over to the “cancel culture” that is undermining serious intellectual debate today.
From the PS Archive
Rogoff worries that the failure of US policymakers to rein in the top five firms is impeding innovation. Read more.
Rogoff anticipates a long-term collapse in the price of Bitcoin, but a bright future for the underlying technology. Read more.
Around the web
Rogoff, Reinhart, and Ilzetski assess whether the secular decline in exchange-rate and inflation volatility will survive COVID-19. Read the paper.
In a recent interview, Rogoff explains why the COVID-19 crisis really is different. Read the transcript.