In my recent post on
the ‘biggest policy mistake of the last decade’, I emphasised the
irrelevance of the academic consensus on austerity if politicians did not want to
listen. It was, inevitably, a picture painted with a broad brush.
I did not discuss,
for example, an element that should form part of the transmission
mechanism for academic knowledge but didn’t, and that is European
central banks. As I have discussed here,
these central banks are full of economists applying state of the art
macroeconomic knowledge, so they should be a source for the current
academic consensus. But these central banks are also very
hierarchical, and if the senior staff want to give out a different
message they can. In Europe that message was that austerity was
necessary, and worse still that the lower bound for interest rates
was no impediment to their ability to control the economy.
This was a serious
mistake for two reasons. First, central bank leaders were going
against the knowledge that their own economic models and analysis
gave them. Second, their implication that the lower bound for interest rates didn't matter was not only very wrong but also encouraged politicians to continue with
austerity.
But there was a
perhaps surprising route by which the academic consensus did get
through, and that was the International Monetary Fund. The IMF itself
wavered on austerity. At first (before 2010) it encouraged
coordinated fiscal stimulus. As the Eurozone crisis began to unfold
it changed its mind, and advocated austerity. But this did not last
that long. I remember visiting the IMF in September 2012, and being
told of empirical work
by their Chief Economist Olivier Blanchard and Daniel Leigh that
suggested multipliers might be much larger than the received Fund
wisdom at the time. It was nice for me, because one of the talks I
gave was why from a theoretical point of view multipliers might be
large when interest rates were stuck at their lower bound.
This was not the
only piece of Fund work that undermined the case for austerity.
This
analysis questioned the empirical case for expansionary austerity, as I discussed here.
Economists at the IMF also showed
clearly how unusual the behaviour of government spending after the
Global Financial Crisis was compared to previous recoveries:
austerity, far from being the norm, was an untried experiment. Indeed I
think it is fair to say that if you wanted a source of empirical
analysis on the impact of austerity, the IMF was your first port of
call.
As Ben Clift
discusses here,
the IMF have also pioneered analysis of how inequality, and perhaps
even large financial sectors, may be bad for growth, and much more
that you would not have expected from the IMF of the last century.
But he also points out something I emphasised in a post
I wrote after my visit. The IMF is extremely heterogeneous. Alongside
more modern views of the role of fiscal policy you will also find
traditional fiscal hawks. The IMF also has its hierarchy with more
political masters, but the difference is that at the IMF today there
is no rigid control of what gets published by its economists.
For example, the IMF
have an Independent Evaluations Office, which appears to be lead by economics
rather than politics and which is often critical of IMF practice.
I noted here,
for example, a 2014 analysis of austerity, which criticised the
support the IMF gave to austerity from 2010. The report essentially
suggested that parts of the IMF had been panicked by the Eurozone
crisis, which also presumably gave the fiscal hawks in the
institution the upper hand. The report also explains why this panic
was unwarranted given what we now understand about the Eurozone
specific causes of that crisis, and this together with the Blanchard
and Leigh analysis helped turn the tide against a belief in the
virtues of austerity in the IMF.
All this IMF work was clearly very
helpful to those economists like myself who were arguing against
austerity at the time. It didn’t change policies in the UK and
among Republicans in the US because those policies were ideologically
based. I doubt it had much impact in Germany either. However it might
be possible to argue it had some influence in softening the line taken
by the EU Commission. If you look at the OECD’s estimate of
underlying primary balances, 2013 was the last year of fiscal
contraction in the EU as a whole.
Prof, you and your fellow economists are being played.
ReplyDeleteThe European project is a political one, not an economic one. The ECB is not there to make people better off, it is there to support the EU as a political institution and to ensure the stability of a German-centric political union.
Economists are the modern equivalent of witch doctors and Shamen. When the authorities decide to do something, they bring out economists to pronounce the policy good and all the alternatives bad. It doesn't matter that economists have missed all the major economic events of the last 50 years, or that they have successfully forecast twenty of the last two recessions, what matters is that they provide a rational for the policy that can be used to ward off criticism ("our finest minds have given it their approval. Who are you to criticise?"), even if that rationale is entirely bogus.
You are surely right that the value of freedom and openness in research - in the IMF and elsewhere - is something to be treasured. But maybe you miss a point about central bank leaders as well as the EU Commission. National central bank heads are appointed by governments with particular ideologies and tend to reflect that. Jens Weidman at the Bundesbank is an obvious case. They have a job to do, are organised hierarchically to do that and are not open research institutes. The EU Commission tends to reflect the dominant ideologies of governments elected in Member States. The dominant ideology at the time of the response to the financial crisis (UK, Germany, Netherlands, Spain, with France something of an exception) was fiscal conservatism, because parties with that ideology won elections. So your real target, as it is unfailingly when you write about the UK or the US, should be more the ideology and less the institution. How those ideologies are transmitted within institutions is an interesting issue, but that is more to do with the nature of democracy, power, influence and openness on which you have a lot of interesting things to say, especially about the media. ‘Independence’ of central banks or international institutions sounds nice, but only has meaning within a particular context of power and cultural tradition.
ReplyDeleteI must say to put your faith in the IMF is to forget what they have done in the past, this is a political organisation where people who are trusted to maintain the status quo are appointed.
ReplyDeleteThe staff at the Bank of England and the IMF are most certainly knowledgeable and fully understand how the system works and is failing, but they are not appointed by Neo-Liberal governments who do their bidding, its one thing to be presented with the facts and another to act in good faith on those facts.
We should never confuse expert opinion within these organisations with the political appointees who there to maintain the status quo.
If we really want change, then these positions should be elected at a general election, where they then could declare their real positions before being placed in position. They could also be removed by the same process when they are seen to be contradicting what they said they stood for. This government is in control and no one should forget it.
Somehow the pluralistic views don't make it into their policies. Take the IMFx Financial Programming MOOCs. They are hard-core neoliberal. Most of the posters in the forums are developing nation officials or aspirants who swallow the balanced-budget story whole and regurtitate it eagerly upon demand. "How can I best help you destroy any trace of spirituality left in my countrymen, O Imf!"
ReplyDeleteFor an indication of the guiding philosophy of the IMF since its inception, see this article on why austerity grows GDP more than raising taxes: https://www.imf.org/external/pubs/ft/fandd/2018/03/pdf/alesina.pdf . They will pay lip-service to pluralismnas hiring some "controlled opposition" people to write papers. But they're neoliberal to the core, still, when it comes to implemented policies.
So are you, with a softer heart. No wonder you sing the praises of the IMF in this blog.
Is it fair to say that the overall role of the IMF is to handle the mess that comes from government debt not being denominated in a country's own currency? If governments only borrowed in their own local currency then the IMF would be redundant? As such, the honorable approach for the IMF would be to simply say that all governments everywhere should only borrow in their own local currency (that works even for tiny countries such as Iceland and even for third world countries such as Botswana) and so put the IMF out of work.
ReplyDelete