SPEAKERS
Kenneth Rogoff Professor of Economics Harvard University Executive Interview	James Burkhard CERA Managing Director
Daniel Yergin CERA Chairman (Chair)

In a Special Address on Energy and the Economy, Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University, gave his views on the US recession, the global economic slowdown, and the elements driving each now and in the future. Before the packed ballroom Dr. Rogoff called himself realistic, not bearish. Since commodity prices remain high, “it’s very hard to reconcile that with a global recession.” With the mild US recession, the rest of the globe might experience an economic slowdown; he was more cautionary on regional impacts, citing risks for China.

The US recession has been long in the making; the “subprime mess” is just a symptom, he said. Two true drivers are “the slowdown in the amazing productivity boom that began in early 1990s” and the incredible housing boom. Although the coming crash “is painful,” he said, housing prices will remain “a heck of a lot higher.”

The length and depth of the recession depends on the losses—estimates range from $50 billion to the G7’s $400 billion or Dr. Rogoff’s $1 trillion from combined trade, credit markets, housing, and productivity. “It doesn’t look good,” he cautioned. Bailouts like the US government’s “giant” economic stimulus package he called “not so giant” and “late window-dressing.” The policymakers’ “gut reaction to cut interest rates and to pump some kind of stimulus into the economy” is suspect. The impact globally depends on links to the US economy and whether an economy has followed the US pattern. The United Kingdom, Spain, and Ireland may have a similar trajectory; Japan’s slowdown relates to competition with China. China is at risk in part because “everyone has a financial crises, and repeated crises, when they’re emerging markets” balancing political and social changes. China’s leaders “have done a great job,” but some solutions to inflationary pressures—price controls, wage controls, and antifiring regulations—are “worrisome.” China’s growth rate could drop nearly 50 percent, from 11 to 6 percent. Emerging markets “drafting off what’s happening in China” will not escape.

Dr. Rogoff also disagreed with the previous CERAWeek speaker, Nobel Laureate Dr. R. K. Pachauri, who estimated that dealing with climate change might mean a 3 percent decrease in global gross domestic product. Dr. Rogoff considers the cost much greater, as governments “won’t do all the things they’re supposed to.” He favors a carbon tax as one market-based solution.

Mr. Rogoff concluded, “We are in a window of vulnerability. If another shoe drops, the US economy is less resilient.” By end-2009 oil could be in the low $70s per barrel. But the dollar will continue to fall. Eventually interest rates will drop in Europe and most of the world, all part of the process of the slowdown.

Mr. Rogoff then joined James Burkhard, CERA Managing Director, Global Oil Group, K. F. Yan, CERA Director, China Energy, and Daniel Yergin, CERA Chairman, for a discussion. Dr. Rogoff considers decoupling “nonsense,” noting the size of the US economy and the follow-on problems in other countries. Inflation will remain for a couple of years; lower interest rates just mean “we’ll pay down the road.” Policy solutions must “be clear and consistent;” an economic policy “matters most when it is erratic and unpredictable.” Protectionist attitudes are worrisome. The slowdown will increase capital flows to China and emerging markets, but a later pullout may create problems. Nor can the sovereign wealth funds save the day; Dr. Rogoff noted that a bailout of a big ten US bank was perhaps in the future, but the funds cannot move quickly enough to offset global economic weakness.