Kenneth Rogoff on Growth, Inequality, Financial Crises, and the Future of Money

April 2018. GrowthPolicy’s Devjani Roy interviewed Kenneth RogoffProfessor of Economics and Thomas D. Cabot Professor of Public Policy at Harvard University on Growth, Inequality, Financial Crises, and the Future of Money. | Click here for more interviews like this one.

Links: Kenneth Rogoff’s faculty page at Harvard | Personal website | His New York Times bestselling book, The Curse of Cash: How Large-Denomination Bills Aid Crime and Tax Evasion and Constrain Monetary Policy (Princeton University Press, 2017) | This Time Is Different: Eight Centuries of Financial Folly (with Carmen Reinhart) (Princeton University Press, 2011) | Research page on DASH (Digital Access to Scholarship at Harvard | SSRN research page

Growthpolicy.org. What should we do about economic inequality?

Kenneth Rogoff: Clearly, a more progressive system of taxes and transfer is the obvious starting point for countering secular market trends in income and wealth inequality.  It is also important to rethink our education system from the ground up, not only to make it dramatically more equal, but also to exploit the internet and other digital technologies to offer people life-long learning options, so that people have more expanded options for retraining and retooling in a world in which jobs are likely to morph ever more frequently.

I believe that an abject failure of anti-trust policy has also been a major factor in increased wealth concentration.  For example, it is incredible that until now, policymakers have not thought seriously about the competitive and privacy implications of concentrated data ownership.

It is important to keep in perspective that although inequality within the rich countries has been exacerbated over the past four decades, by most measures, global inequality has dramatically decreased. A large fraction of the world’s least-well-off individuals, particularly in India and China, have been lifted out of abject poverty, largely because their governments have adopted key aspects of the Western capitalist economic model.

Unfortunately, calls for trade protectionism and a retreat from the liberal trading order threaten this dynamic.  In a 2004 Brookings paper for a conference on “Growth and Poverty in the 21st Century,” I argued that inequality, not poverty, is likely to become the dominant theme as global growth continues to eradicate most absolute poverty. Unfortunately, the anti-poverty battle is far from won, and the moral case for policies to help the middle class in rich countries at the expense of the very poor in Africa, South Asia, and conflict states such as Syria, is a weak one.

Growthpolicy.org. In a recent essay, “When Will Tech Disrupt Higher Education?,” you note, apropos of introducing technological innovations into the traditional college classroom: “This does not mean a one-size-fits-all scenario: there could be a competitive market, as there already is for textbooks, with perhaps a dozen people dominating much of the market.” What would be some ways in which brick-and-mortar universities could position themselves as attractive investment opportunities for technology companies?

Kenneth Rogoff: Goodness, I don’t think I had in mind an Amazon University supplanting Harvard.  What seems clear, though, is that in order for today’s brick-and-mortar universities to remain relevant in the future, they will have to restructure themselves so that students spend a significantly larger component of their time engaged in active and collaborative learning, as opposed to passive learning.  It is highly inefficient to have students sitting in a large live lecture class, or to engage in endless memorizing of facts.  Of course, finding new approaches is an ongoing area of experimentation — for example, flipped classrooms. But enormous inertia in universities’ structure and bureaucracy still leaves higher education ripe for the kind of radical disruption that has hit one industry after another, from media to manufacturing to legal and financial services.

Growthpolicy.org. On the subject of long-term economic growth, you have argued, “[A]advanced economies cannot hope to repeat the dynamism that the US enjoyed from 1995-2005 […], much less the salad days of the 1950s and 1960s.” What role might Artificial Intelligence play in promoting the drivers of economic growth, say, higher wages, greater purchasing power, and increased consumer demand? 

Kenneth Rogoff: Your question refers to drivers of demand, but by far the most important driver of long-term per-capita income growth is aggregate supply, which depends on technological advance as well as investment in physical and human capital.  While demand certainly has transitional effects thanks to temporary Keynesian price rigidities, in the long run, it mainly affects prices.

There are many reasons for the trend decline in productivity growth, including an ebbing of the first tech innovation wave, but the observed slowdown in productivity was also greatly exacerbated by frictions and uncertainties that followed the financial crisis [of 2008]. As Carmen Reinhart and I showed in our 2009 book and earlier related work, financial crises often lead to long protracted slowdowns.  I strongly suspect we will see a recapture of some of this lost productivity growth over the next decade, as financing strengthens and post-crisis uncertainty ebbs.

Beyond that, artificial intelligence and robotics will almost certainly play a major role in increasing the pace of productivity growth in the twenty-first century, although the exact timing depends on a resolving a host of issues. For example, self-driving vehicles are surely going to dominate the future, but there are a wide range of views on when, exactly, that might happen.  But even if per capita growth is high, there is every reason to be worried that inequality will worsen, and hence the need to search for better and more progressive tax, transfer, and education systems.

Growthpolicy.org. In an essay on the Federal Reserve, you claim, “When the Fed gets it right, price stability reigns, unemployment remains low, and output hums along. But ‘getting it right’ is not always easy [.]” The Federal Reserve, as we know, celebrated its centennial a few years ago. As someone who is both an economist who has served on the Federal Reserve System and an economic historian of note, how do you envision the Fed’s role changing over the next one hundred years? 

Kenneth Rogoff: For sure, one major issue the Federal Reserve will have to deal with is the replacement of physical currencies with digital currencies, which is covered in my recent book on the past, present, and future of currency, The Curse of Cash.  I realize there are cryptocurrency evangelists hold the libertarian view that Bitcoin and its cousins will make government-issued fiat monies obsolete, but that is nonsense.  The private sector has almost always been the innovator in new currency technologies, but in due time the government always regulates and appropriates.  The government isn’t going to lose at a game where it can keep changing the rules to tilt the playing field in its favor. Eventually governments will have their own retail digital currencies (which will not be anonymous).

In the meantime, governments cannot idly watch growing use of pseudonymous currencies to exacerbate tax evasion and crime.  For starters, they need to apply anti-money laundering and securities laws to cryptocurrencies.  Eventually, it may be necessary to take the further step of preventing banks and retail establishments from accepting them.

There are many other implications of the digitization of payments. For example, right now the Fed gets massive revenues from the printing of $100 bills, which appear to be mainly used in the shadow economy. But space does not permit an extensive discussion. It is in my book and other writings.

Growthpolicy.org. You are a chess Grandmaster, the world’s most elite cadre of chess players. Harvard is known for celebrated decision theorists such as Thomas Schelling. What would be your argument(s) for the connections between chess and good decision making?

Kenneth Rogoff: Although international grandmaster is a life title in chess, I have basically been retired for nearly forty years, though I still follow it, from a distance. I strongly believe that learning chess can give valuable skills to young people, including learning the value of long-term strategic thinking, and I feel I have made use of that in some of my own research.  Another important lesson is that no matter how deeply you think you understand a position, there is always something more to be learned.  Surely the same is true in every field of economic research.  Last but not least, chess teaches one to remain calm under pressure, and to keep thinking clearly even after inevitable mistakes, an invaluable skill in virtually any real-world policy setting.