Members of a panel of five Harvard economists emphasized the need for U.S. policymakers and households to cut down on borrowing and increase savings during a panel discussion on Tuesday, October 13 at Harvard University in Cambridge, Massachusetts.
Panelists cautioned, however, that any financial rebalancing in the U.S. must be gradual in order to prevent a collapse of economic activity, and cautious in order to prevent damage to long-term growth. It will also require cooperation from other countries such as China, which need to rebalance their own economies in the opposite direction.
Speaking on the panel were economists John Y. Campbell and Richard Freeman of Harvard's Faculty of Arts and Sciences, public policy professor Kenneth Rogoff of the Faculty of Arts and Sciences, financial economist David S. Scharfstein of Harvard Business School and Bridgitte Madrian of Harvard's Kennedy School of Government.
"The U.S. economy is like a bus on a winding mountain road," said Campbell. "It needs to turn a corner, but it can't do so too quickly, or it will tip off the road altogether. And drivers coming the other way must give us the space we need to make the turn."
The economy has recovered faster than expected since spring 2009, Campbell said, as markets have rebounded and banks have rebuilt capital. In addition, the cost to taxpayers of government bailouts has been lower than originally feared. Recovery in the so-called "real economy," however, has been weak. Long-term unemployment remains very high. Meanwhile, the stagnant labor market has fueled populist anger against incumbent politicians, contributing to government paralysis and uncertainty over the direction of future policy, setting off a vicious circle that has undermined business confidence and further weakened the recovery.
While the TARP financial bailout helped resolve the acute problems that led to the financial crisis, Campbell said, chronic problems remain. Among the long-term issues Campbell identified are a low household savings rate, pension and health care entitlements that will become unaffordable as the population ages, an inefficient tax system, and insufficient investment in public goods such as research and infrastructure.
Freeman, a labor economist at Harvard, said the economy could take until the end of the decade to reach full employment, noting that payroll cuts in state governments are exacerbating problems in the labor market as the sluggish economy squeezes public sector finances. In sharp contrast, he said, China's government instituted a wave of new infrastructure projects in the wake of the financial crisis and kept strict requirements that banks lend out government stimulus money instead of keeping it in reserve. These measures, in addition to strong international trade, helped set the stage for the current labor market boom in that country, he argued.
