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The Frenchman Who Reshaped the IMF

From the Globalist:

Reflections on the work of Olivier, the IMF’s now retired chief economist. 

The IMF is often caricatured as an institution that wants to nail every problem with the hammer of austerity and structural reforms.

An article in TIME claimed that the IMF tends to “dish out roughly similar advice to all countries, no matter what their circumstances,” noting that a cursory look at the IMF’s website would show that “prudent fiscal policy and reforms” had been recommended to Lesotho, France and Russia.

Whatever the merits of the caricature, Olivier Blanchard, the French-born, former MIT economist who served as the IMF’s chief economist from September 2008 to September 2015, achieved a rare feat.

He not only changed perceptions of the institution both on the inside and the outside but also, even more crucially, managed to reshape IMF policies.

Under Blanchard’s watch, the IMF:

  • lent its support to a global fiscal stimulus during the Great Recession
  • urged a very cautious removal of this stimulus during the Not-So-Great Recovery, and
  • staunchly advocated easy monetary policies—including quantitative easing.

Even a famous critic of the institution agreed: “A recovery in aggregate demand is the single best cure … what a relief to hear the Fund say that,” Paul Krugman cooed about the thrust of IMF policy prescriptions during the Great Recession.

Olivier Blanchard also threw out some controversial ideas for discussion, such as: Should inflation targets be raised?

That idea ran into some predictable criticism (“if you flirt with inflation, you end up marrying it,” said a former German Bundesbank president).

But it also drew fire from friendly sources—Blanchard’s mentor and long-time collaborator Stan Fischer, currently the U.S. Fed Vice Chairman, thinks that a higher target would be a “mistake.”

Blanchard also nudged the IMF towards less doctrinaire positions on several other issues, notably on the use of capital controls during crises.

He thereby gave an impetus to a rethinking that had started after the Asian crisis of 1997-98—see my article for The Globalist entitled “The Vindication of Joe Stiglitz.”



The fiscal triptych

The biggest change that Blanchard brought about was in the IMF’s advice on fiscal policies. This came in three steps:

  1. In early 2008, Larry Summers advocated a U.S. fiscal stimulus that was “timely, targeted and temporary.” Avoiding alliteration’s allure, Blanchard and co-authors advocated a global fiscal stimulus that was “timely, large, lasting, diversified, contingent, collective, and sustainable.”
  2. Next came a chapter in the October 2010 edition of the IMF’s flagship publication (World Economic Outlook), which Blanchard played an active role in shaping. To the question “Will austerity hurt?” the chapter gave a clear answer: “Yes.
  3. And then came three pages that Gavyn Davies in a FT blog said could have “a greater effect on global economic policy than all of the interminable” sessions held in Tokyo that year at the Bank-Fund annual meetings.

This was in the October 2012 World Economic Outlook—and subsequent paper — where Blanchard and his colleague Daniel Leigh showed that “in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected.”

Translation: the adverse impact of austerity on output was perhaps larger than had been expected.

The upshot of this work was not that fiscal consolidation should never be undertaken. Rather, it was that one should expect austerity to lower output.

Moreover, this effect could be greater in some circumstances (e.g., when monetary policy was constrained because policy interest rates could not be pushed below zero).



It wasn’t just fiscal

Here are three other areas where Blanchard left his imprint through his own writing, by guiding the work of others or by creating an open atmosphere where his staff could explore new pastures:



Who’s afraid of capital controls?

Blanchard presided over a series of papers by IMF staff that nudged the Fund towards a more flexible position on capital controls.

A December 2012 blog by Blanchard and Ostry “explains the logic and research that underpins the shift” in the Fund’s position.



The “4% solution”

In a paper with Giovanni Dell’Ariccia and Paolo Mauro, Olivier posed the question: “Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks?”

Though the paper never explicitly advocated a new 4% target (that was done later by Larry Ball in an IMF working paper), and certainly not one to be adopted right away, this quickly became known as the “4 percent solution.”



Inequality

The IMF has received a lot of credit for its work on inequality. The finding that captured attention — by Jonathan Ostry and Andy Berg — was that inequality was detrimental to sustained growth.

Blanchard initially regarded this finding as an interesting cross-section correlation and then as a correlation that had cleverly tapped into the zeitgeist.

It is only more recently, in his foreword to the April 2014 WEO, that Blanchard has come to the view that the implications of inequality for macroeconomic developments are a “central issue.”

From the Globalist:

Reflections on the work of Olivier, the IMF’s now retired chief economist. 

The IMF is often caricatured as an institution that wants to nail every problem with the hammer of austerity and structural reforms.

An article in TIME claimed that the IMF tends to “dish out roughly similar advice to all countries, no matter what their circumstances,” noting that a cursory look at the IMF’s website would show that “prudent fiscal policy and reforms” had been recommended to Lesotho,

Read the full article…

Posted by at 12:14 PM

Labels: Profiles of Economists

Johan Norberg: India Awakes

Since 1991, 250 million people have been lifted out of poverty in India. Johan Norberg’s documentary India Awakes discusses how this happened.
It used to be said that Indians succeeded everywhere except in India. Now Indians are starting to succeed in India.

At an event at Cato, Norberg said that “India is waking up because the government is starting to take a nap every now and then (imposing fewer regulations)”.

“What you can do and at what price matters more than who you are or what caste,” said Norberg.

“It’s morning in India but that is when the work day begins.”

India has set the goal of being in the top 50 countries in the World Bank’s Doing Business Index. Today it is at number 142 out of 189 countries.

A lesser known fact about Norberg is that he helped me inaugurate the IMF’s Book Forum: the topic was “Capitalism and its Critics”. The transcript makes for very interesting and prescient reading today – all the speakers (Jerry Muller, Ann Florini and Norberg) brought their ‘A’ game. For a short summary of the event click here.

Since 1991, 250 million people have been lifted out of poverty in India. Johan Norberg’s documentary India Awakes discusses how this happened.

It used to be said that Indians succeeded everywhere except in India. Now Indians are starting to succeed in India.

At an event at Cato, Norberg said that “India is waking up because the government is starting to take a nap every now and then (imposing fewer regulations)”.

“What you can do and at what price matters more than who you are or what caste,”

Read the full article…

Posted by at 5:50 PM

Labels: Profiles of Economists

Tom Sargent on U.S. and Europe: A Blast from the Past

Nobel-Prize winner Tom Sargent has an op-ed in the WSJ. Some of it was in an interview he did with me a couple of years ago.

Loungani: Europe’s fiscal challenges are foremost on minds here. This is something you have worked on in the past—the interplay of monetary and fiscal policy. 

Sargent: Yes. I think Europe can learn from the U.S history. In the 1780s, the U.S. consisted of 13 sovereign states and a weak center. The states could levy taxes, the federal government could not. Government debt, federal plus state, was 40 percent of GDP, very high for a poor country. It was a crisis. Creditors worried that they could not be repaid. 

Loungani: How was it resolved? There wasn’t an IMF … 

Sargent: Well, in the end the outcome was that the U.S. founding fathers rewrote the constitution so that it gave better protection to creditors. The constitution reflected a grand bargain: the central government bailed out the states, and the states gave up the power to levy tariffs. Knowing that the federal government had the power to raise tax revenues gave creditors reassurance that their debts would be repaid. 

A fiscal union 

Loungani: You’re saying the present U.S. constitution was adopted to give better protection to creditors? 

Sargent: Yeah, makes me sound like a Marxist, doesn’t it? But it’s all there in our history. Alexander Hamilton was basically creating a fiscal union—bailing out the states in return for a transfer of tax-levying authority to the center. And the point of a fiscal union was to change the expectations of creditors about the chances of being repaid now and in the future. Note, by the way, that the U.S. had a fiscal union before it had a monetary union. 

Loungani: So what are the lessons for Europe today? 

Sargent: Don’t some aspects of the EU today remind you of the historical experience I’ve described? The member states have the power to tax, not the center. Many EU-wide fiscal actions require unanimous consent by member states. But reforms that could lead to a fiscal union are being proposed, as they were in the U.S. in the 1780s. I think at the very least the historical episode—not just the one I described but several others that I could—shows that many configurations of fiscal and monetary arrangements are possible, and some of these work to provide assurance to creditors that there will be enough tax revenues to service the debt. I offer this as hope, but I must say that I am not an expert on day-to-day European economics or on their politics. 

Curing U.S. unemployment 

Loungani: You are an expert on the U.S., and particularly on unemployment, which you’ve also worked on over the years. What would you do about the high U.S. unemployment rate? 

Sargent: I would deal with the fundamental causes of financial crisis—the housing market particularly, where there are debts that haven’t been settled and people can’t yet see how they will be settled. And then to the extent that uncertainty about the course of government regulations is holding things back, I’d tackle that. 

Loungani: That could take time. How would you ease the pain of the unemployed in the meantime? 

Sargent: Some of the European countries, Germany and the U.K., have the right idea. They seem to do better on what’s called welfare-to-work programs—ways of helping the unemployed get into new jobs. We could have done more of that here in the U.S. 

Loungani: We extended unemployment benefits many times. Were you in favor of that? 

Sargent: I worry that can be a trap—we could end up with persistently high unemployment. 

Loungani: Why? 

Sargent: You have to go back to the basic ideas in the work that I’ve done with colleagues over the years. Our work builds on the finding that after about 1980 something changed. The [adverse] hits that people suffered to their incomes became more permanent in nature. In the jargon of our profession, the volatility in the permanent component of earnings increased; workers were more likely to suffer permanent shocks to their human capital. Tom Friedman’s The World is Flat has many examples of all this and the reasons why it happened. So we talk about the Great Moderation at the macro level but for individual workers it was just the opposite. 

An unemployment trap 

Loungani: How does this lead to the trap? 

Sargent: Well, think about what can happen when workers suffer a permanent hit to their incomes, and you offer then the alternative of generous and long-lasting unemployment benefits. For older workers, particularly, the benefits become an attractive option relative to looking hard for another job, which is not going to pay as much because your human capital just took a hit. And getting retrained is hard. I mean I was just 30 when my human capital was hit. You know I went to Harvard, right? I actually got pretty good at playing around with the IS/LM model, which is what I learnt there. And then a new thing—rational expectations—came along and I had to learn all this math and it was hard. Well, if you’re in your 50s you’re not going to be eager to try out the hard things. You’ll try to get by with the unemployment benefits. You end up with lots of workers who are detached from the labor force. I think that’s what happened in Europe in the 1980s. They’d always had more a generous welfare system but the impact of that wasn’t felt until the nature of the shocks to incomes changed in the manner that I described. 

Loungani: Yes, the interaction of shocks and institutions. Olivier Blanchard once said when the shocks changed Europe became like someone wearing a winter jacket in the summertime—the labor market institutions curbed flexibility when it was needed. 

Sargent: Exactly. So I think the people who want to keep extending U.S. unemployment benefits have the right motives but we can end up in the wrong place—a world of persistent high unemployment. So, while in the case of fiscal institutions Europe could look to early U.S. history, in the case of labor market institutions, the U.S. should keep in mind the European experience of not so long ago. 

Nobel-Prize winner Tom Sargent has an op-ed in the WSJ. Some of it was in an interview he did with me a couple of years ago.

Loungani: Europe’s fiscal challenges are foremost on minds here. This is something you have worked on in the past—the interplay of monetary and fiscal policy. 

Sargent: Yes. I think Europe can learn from the U.S history. In the 1780s, the U.S. consisted of 13 sovereign states and a weak center. Read the full article…

Posted by at 11:49 AM

Labels: Profiles of Economists

Robert Barro doesn’t look 70

My profile of one of my thesis advisors, Robert Barro, for whom the LSE held a major conference last week. Of all the profiles I’ve written I like this the best — I think I knew the subject matter well and it shows. 

My profile of one of my thesis advisors, Robert Barro, for whom the LSE held a major conference last week. Of all the profiles I’ve written I like this the best — I think I knew the subject matter well and it shows. 

Read the full article…

Posted by at 12:15 AM

Labels: Profiles of Economists

Nobel Prize winner Robert Shiller on house prices … and Eliot Spitzer

My ‘golden oldie’ interview with Robert Shiller still makes for interesting reading. It is prescient but even Shiller could not have predicted the fate of Eliot Spitzer.

Shiller on US corporate scandals: “On that score I’m actually somewhat sanguine … Eliot Spitzer has been going after corporate crime as aggressively as Eliot Ness, the guy who went after the gangster Al Capone. Combine that with people like … William Donaldson, Chair of the SEC, and it adds up to a lot of people who are really doing their jobs. The budget for the SEC has really been increased; for 2004, it was over $800 million, more than double what it was five years ago. And people can see what a price Martha Stewart paid for acting on a tip. This is the U.S. solution: the United States has generally handled financial scandals aggressively.”

Shiller on housing markets (in 2004): “I’m not exactly sure what’s going on with housing prices. People still report that a major consideration for their buying houses is that they think it is a good investment; that is, they expect house prices to appreciate. But fewer people report buying houses just to make a profit from speculation. I think the thought process a lot of homebuyers are going through right now is more like: I know prices are too high, but that’s what I thought last year and prices still went up. I better buy now before I’m totally priced out.”

Shiller on importance of combining psychology and economics: “We know the role that overconfidence and wishful thinking play in driving financial markets. But psychological theories have still not been completely integrated into economics. Human behavior is very complex, and economists have been in the mood to simplify it, and simplify it heroically. We will have to change our whole approach to problems—our methodology and our tool kits—if we are serious about grappling with the complexity of human behavior.”

Shiller on how he got into behavioral finance: “I wasn’t much of a rebel as a graduate student. My dissertation was on rational expectations. But I was always a bit skeptical about conventional economic theory. An early formative influence was George Katona, who wrote the book Psychological Economics in 1975. I never took one of his courses, but I sat in on one of his lectures and was impressed. It seemed fine to me, then, that there were only a few people like Katona who wanted to sit halfway between economics and psychology. It wasn’t as clear to me then as now that psychology should be central to economics. Much later, Stan Fischer invited me to write a review essay critiquing the rational expectations revolution for a conference he’d organized. Writing that essay awakened further doubts about rational expectations, which I always thought of as a construct that had some interest but was a small part of a big picture.”

Read the full interview here and also a very nice profile of Shiller written by Paolo Mauro.

My ‘golden oldie’ interview with Robert Shiller still makes for interesting reading. It is prescient but even Shiller could not have predicted the fate of Eliot Spitzer.

Shiller on US corporate scandals: “On that score I’m actually somewhat sanguine … Eliot Spitzer has been going after corporate crime as aggressively as Eliot Ness, the guy who went after the gangster Al Capone. Combine that with people like … William Donaldson, Chair of the SEC,

Read the full article…

Posted by at 1:07 PM

Labels: Housing, Profiles of Economists

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