Captioning sponsored by Rose Communications from our studios in new york city, this is charlie rose. Rose we begin tonight with an assessment of the u. S. And Global Economy, all eyes remain on efforts to avoid the fiscal cliff deadline on january 1st, when automatic spending cuts and tax increases are set to take hold. There is growing optimism on capitol hill that a deal could come soon, yesterday president obama said he would be willing to lower his revenue goal and tax increases at 400,000 instead of 250,000 per household. John boehner said he developed a backup plan to avert yearend tax increases if the negotiations with president obama stalls, this occurs in the backdrop of an economic that is bettering on housing and employment data, the Global Economy continues fragile with the european debt crisis and china i in in. Rogoff is a professor of Public Policy and economics at harvard, he is a coauthor of the best selling book, this time is different, eight centuries of financial folly, many consider it to be the authoritative text on the impact of financial crisis around the world. I am pleased to have ken rogoff back on this program. Welcome. Thank you, charlie. Rose let me start big, if i may. So i mean, how do you see as we enter a new year the Global Economy . Well, to state the obvious, everybody is growing more slowly than they would like to, if at all. Europe is basically flat, the u. S. Is improving, but it is not exactly galloping and, you know, we are entering probably a weak quarter where people are hoping it will be stronger over the course of the year, china is slowing some and in general all of the emerging markets are slower than they were most of them india has slowed dramatically, brazil is slow, so yes, indeed it is a fragile situation, when the u. S. Is one of the bright spots, you know, eking out make two percent growth, one percent growth this quarter you know things arent very good. Rose do you expect to see, speaking of the United States, growth rate getting back close to four percent . Well, you know, it is in the realm of possibility, but i think the trend growth rate, you know, is going to be more on the order of two and a half and i mean some days some quarters it will be worse than that, some quarters it will be better than that. There are many private forecasters calling for it to be three percent by years end, i think we are doing pretty well if that happens. Rose if we get to three that is good . Yeah. I think i would be pretty happy with getting to three, it is not going to solve our unemployment problems, any time soon, we really need 45 percent growth for a sustained period to really seem out of this, but it stuz, steam out of this, but it gives modest improvement. Were you pleased to see the fed focus on unemployment and jobs . Yeah, absolutely. I mean, i think the fed is in this difficult situation where it clearly needs to express its message more forcefully, because it is not just about, you know, how much quantitative easing it does, but about the message behind it, so i certainly have welcomed their change towards focusing on final output, on employment and inflation, i would have liked to see a little bit looser inflation target, because i think realistically they need to get Inflation Expectations up to help drive investment, but this is definitely a welcome change. I think we are still in an evolution, i think there is more to come. Rose does this economy need a stimulus of some kind . Well,. Rose whether from the fed or from the congress . I dont think we can live on stimulus forever. Certainly withdrawing too rapid a rate in such a fragile economy makes no sense and the plan of sort of gradually tightening policy over a long period is the right one, but in the but the real problem is just that our system is so paralyzed and isnt able to to be creative, the private sector is creative but the government is just paralyzed the tax system needs to be reformed, we need to have areas where we spend money like infrastructure and improving education. There are other areas where i think we need to rein in a bit on entitlements and Everyone Wants to keep what we have and in this static situation and it is a changing world and it is not a healthy one. Rose does it define negotiating tactic for the president to say i agree on you on entitlements and this is what i will do and therefore you should agree on revenue and this is what you should do . I see the president s strategy, the longterm advantage as really lets raise taxes on the wealthy, then lets do it again, then lets do it again and finally we can go to people and say you know what . This isnt enough we need to cut entitlements, we need to raise taxes on the middle class. We have to have the private sector do some things that the government sector is doing now. We have to have changes. But as long as there are this politically low hanging fruit, it is really hard to move ahead more broadly, and the republicans on the other hand, you know, are trying to say, well, we really have got to look at the longer term here, you have got to be kidding that you are not going to cut entitle. S, the math just doesnt add up. Rose is the debt the problem that there is some disagreement . Your colleague paul krugman in writing in the column, every other column in the New York Times says it is not about the debt, it is not about the debt. Is it about the debt . Well, of course it is about the debt, i mean we have record public debt, private debt, internationally, and it is not the only thing, i mean clearly we want to leave our children a good infrastructure. We want to leave them improving technology, a good education system, all of the things the earlier generations left us, but on the other hand, if you have a very large debt it creates all kinds of inner generational tensions, distribution natural tensions and we are at a level. Where historically it has been problematic and i think it makes sense to gradually rein it in, i do not advocate anything radical, my coauthor, Carmen Reinhardt similarly does not advocate anything radical, radical meaning,. Rose by radical you mean some austerity, draconian austerity. Draconian, in fact i would welcome more Infrastructure Spending if it were well spent because certainly the United States needs that, although i would like to see more private funding of infrastructure and have the private sector gradually take over some of the things on which the government has held a monopoly. Rose what is the appropriate percentage of gdp and debt . Well, appropriate, i mean, we are at a level rose what how about zero . Rose acceptable, what can we live with and what is manageable and not an impediment to growth . How is that . No one knows for sure, but historically, when you start getting debt levels up at 90 percent and 100 percent of income, you are in a very rarefied air, and those debt levels, historically, have been associated with lower growth, not falling off a cliff, not greece, but lower growth on a sustained beats, you are talking about when you get up debt there, it can hold back your growth for decades there are other things you can do to make up for it, you can have innovation and other improvements but it is definitely problematic. You know, you start getting up at levels twice where we are, then i think it gets really dangerous, nobody knows where inbetween you really fall off a cliff. I thigh it is hyperbole to say that the United States is going to become greece but it is not hyperbole to compare us to japan and wonder if we get stuck in this slow growth quagmire. Europe might be even more in danger of that. Rose okay. Lets stop right there. Do you think that we are at risk of getting stuck in the slow growth quagmire that japan got stuck in, the United States economy . Well, i would say we are in a mild version of it now, and, you know, we need to do improvements and reforms. I dont think spending money is the solution. There are smart ways to spend it for sure, but i dont buy this idea that bigger keynesian stimulus will solve our problems, these fundamental problems with demographics, with slowing innovation, and other things we are experiencing. I think we need more fundamental reform and my colleagues like paul krugman will say, you know, i hear that all the time but i really want to see i want to see stimulus now, and i think we have been doing this for a long time, we are doing it at seven percent of gdp at the moment, and i think it is sensible to try to slowly rein it in. Rose so what should be the percentage of spending to gdp . Okay. Well, clearly it depends, are you paying for education . Are you paying for healthcare . You cant compare the United States and europe because we privately buy a lot of things that they do publicly, you know, overtime, this may sound very theoretical but it is very important, overtime, the things the government provides, very service intensive and always going to keep getting more expensive and i think we need to think about bringing the private sector in, into our infrastructure, maybe more into education, other areas where it brings in money, brings in innovation. I dont think we can live in a world where the government does everything that it does today. We need regulation, you cant just turn over things to the private sector, but if we dont do that, then the costs are just going to rise inexorively you can be a conservative and say i dont want a large government but it is going to grow anyway, you need to decide what the government has to provide besides what it tries to regulate. We are actually on a Pretty Healthy side of that, compared to a place like france, where Government Spending is more than half of gdp. But it is going to keep creeping up and i think we need to be creative and alert to that. Rose i want to talk about what is going on in washington now between the president and the speaker, but if we if they fail completely and we go over this fiscal cliff what are the repercussions . You know, i mean, there is really a fair chance that they dont come to an agreement for whatever reason the House Republicans wont support it and we go into 2013. I dont think that, per say, would be the end of the world because i think there would be a cry and it would get rein reined in after a few weeks and settle on this. I would view this as a skirmish in a bigger war where you are growing entitlements, Government Services are getting more expensive. People are going to pay more and get less, and i think it is a very, very difficult tension of how to deal with that and this is just a first stage of that or one of many stages. So i dont think they are going to settle everything. I do hope they come to an agreement. I certainly hope we dont see another debt ceiling fiasco having the u. S. Default on its debt, even technically would be pretty ugly. Rose what would be a reasonable agreement in your eyes . Well, i mean, almost any agreement would be better than nothing at the moment. Rose right. I am being somewhat facetious. Rose lets assume i would like to see some bigger problem tackled. First of all if everyone admits you cant have an absolute. The republicans say, okay, maybe taxes do have to go up some time, the president says, maybe it into. S do have to get cut. I think that is very important. I clearly there are areas of our tax system which are egregious in terms of their inequality implications, things like carried interest, but of course, you know, i would like to see a bigger plan. I would like to see reform, that seems to be just a dream at the moment. Rose what would be reasonable for the president to agree to . If, in fact, you know, the rates are back to clinton levels and it applies to people who make in a household more than 400,000 . Well, i think he pretty clearly has to get something significant here, he campaigned on it the, he is held fast, if he gives in on this completely what happens to the next disagreement, you know, you just cant fold your cards. Rose that is on the rate side. What should he get on the entitlement spending cuts . Well, i think there are obvious things like raising the age of social security. Rose thats good. Having people with very high incomes, you know, not receive just the same benefits from medicare and social security. There are plenty of adjustments that could be made for the relatively small amount also we y are talking about in the larger scheme of things here, you know, looking at the ten and 20 year horizon they are talking about. Rose when you look at this financial crisis that we saw in 2008, and you look at Historical Data that you so brilliantly covered, when do we come it of this and how does this fit in terms of the data that you saw from previous crisis . Well, it has been very on track to the average of post car crises zero down to the fact that housing is picking up again. You know, typically after five or six years, housing prices stabilize and start to rise, but it takes a long time for employment to come back fully. This is something where, you know, it could certainly take another five or six years to feel normal, and going at the pace we are going at it could take longer than that. But, you know, i wouldnt necessarily say another crisis around the corner unless that were in europe or japan. Rose did you see this crisis coming . 2007 and 2008 . You mean did i short housing . Rose whatever you might have done . Yes, yes, yes, yes. Get all of those out of your portfolio . I think it is fair to say that Carmen Reinhardt and i realized there would be a lot more crises overtime when we started our project in 2002, in 2003, but as the crisis began to unfold in 2007, we wrote a paper showing that looking at indicators like what was happening to housing prices, what was happening to the trade balance, and a number of other macro indicators, the u. S. Was looking very, very vulnerable but it is very hard to just say, you know, i know it is going to happen this minute. The nature of these things, you are watching it unfold before you, little decisions which are seemingly innocuous make a big difference but i think the fact that something had to give with this bubble i think i had started writing about that in the early 2000s. Rose so my question is, how will we know when the next crisis is coming . Well, you know, certainly one indicator is looking at credit bubbles. There is a lot of evidence for that. And i think Central Banks need to go back to looking a lot harder at what has happened to credit throughout the cycle. It is an indicator that sort of got cast by the wayside with this focus on the money supply, and credit is very important and you have to keep an eye on that and, you know, that would certainly have been the number one thing, housing bubbles are another leading indicator, we are in no danger of that at the moment. But there are some indicators and, you know, nothing is perfect like you went back to paul krugman saying well i dont think we have too much debt and maybe he is right right now, but it certainly is the case that, you know, if you keep on the path we are on, eventually we will have too much debt. And it is hard to know exactly the timing. Rose let me just go back to the plan in terms of the debate that is going on at the white house between the speaker and the president. The latest plan from the president would raise 1. 2 trillion in taxes in the next decade. And it would cut one point tutu trillion in spending. Doesnt the ratio have to be about like one for every 1 increase in revenue there has to be a 3 cut in spending . Isnt that a more appropriate relationship . It certainly it certainly is the case that tax hikes hurt growth proportionately more in most cases, and, you know, there are exceptions, but i think i would be concern about having overly weighed toward tax hikes but there are other considers here. Rose but is one to one not the right relationship . There is no scientific number here. We are talking about a move along a bigger path that is going to get adjusted 20 times and we did have the bush tax cuts, which was certainly the proximate reason beyond the financial crisis that the whole thing became so unstable. It is the entitlements that you need to look at. Thats where the numbers really go crazy when you start getting out eight and ten years out. And when the numbers blow up. That is the thing where people are really concerned. And the general principle if you are facing that, you want to try to adjust to it gradually because politically it is very difficult, but i dont think there is some magic number here. Rose okay. Both sides can legitimately hold out for whatever they want. Rose okay. But i am trying to get a fix on what is reasonable when the contours of within we ought to expect and how do you measure reasonableness . Well, i really do think it is not so much the total revenue from tax cuts as the president needs and wants to raise taxes on the wealthy, and probably should be looking at the trawl wealthy too, because that is just the first move towards raising it on everybody else. Our spending on goods and Services Just isnt that much. I mean, cutting defense right now saying we are pulling out of afghanistan, we can cut defense, that seems awfully unlikely in a world where emerging markets are spending more and more on defense, where the issues are getting bigger. Our Government Spending on goods and Services Just isnt that wig big. There isnt that much room to cut things. There are some. I think there is room to substitute, but it is really in the entitlements, medical care, and to much lesser extent social security, that is what you have to look at, and, you know, that is really if you get that straight, then the other things you can sort of tweak at the margin much more. And i would like to see more Infrastructure Spending. I would like to see spending on research and development. Education. I mean, you have to get, you know, moving ahead with our country. You cant just stand still. Rose could the president go to the country and say what you just said and find a willing within the economic community, the financial minute, the markets around the world, if he made that clearly a plan that we need to spend more and investment ideas to contribute to the Economic Growth