The Unassuming Economist

From VoxEU: “The Eurozone crisis has opened fault lines between German economists and policymakers and those in a number of Eurozone (in particular periphery) countries.This column introduces a new eBook explaining the historical development of the ordoliberal school of economics and its influence on German policymaking, and contrasting it critically with what we like to call the Anglo-Saxon-Latin pragmatism of economic policymaking.”

Download the new eBook here.

Dani Rodrik says:

“That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that center-left politicians—Democrats in the United States, Socialists and Social Democrats in Europe—enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatization, financial liberalization, and individual enterprise? Much of our contemporary policy discussion remains infused with norms and principles supposedly grounded in homo economicus.

But the looseness of the term neoliberalism also means that criticism of it often misses the mark. There is nothing wrong with markets, private entrepreneurship, or incentives—when deployed appropriately. Their creative use lies behind the most significant economic achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of neoliberalism’s useful ideas.

The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions. A proper understanding of the economics that lies behind neoliberalism would allow us to identify—and to reject—ideology when it masquerades as economic science. Most importantly it would help us develop the institutional imagination we badly need to redesign capitalism for the twenty-first century.”

Here’s the rest of the article.

My paper with Sangyup Choi, Davide Furceri, and Yi Huang on the effects of effect of aggregate uncertainty shocks on sectoral productivity is now forthcoming in the Journal of International Money and Finance and is available (link) at the JIMF website. First, we find that an increase in aggregate uncertainty reduces productivity growth more in industries that depend heavily on external finance. Second, the mechanism at play is that during periods of high uncertainty, firms that are credit constrained switch the composition of investment by reducing productivity-enhancing investment that is more subject to liquidity risks. Third, the mechanism is stronger during recessions, when credit constraints bind more. For those without access to JIMF, an earlier working paper (link) version is available.

An IMF working paper finds: “This paper assesses spillovers from fiscal consolidations in 10 euro area countries using an innovative empirical methodology. The analysis lends support to the existence of fiscal spillovers, with fiscal consolidation in one country reducing not only the domestic output but also the output of other member states. Spillover effects are larger for: (i) more closely located and economically integrated countries, and (ii) for fiscal shocks originating from relatively larger countries. Most of the impact comes from revenue measures, while the impact of expenditure measures is relatively weaker. The latter result is consistent with the distortionary effects of taxation and empirical literature on fiscal multipliers using the narrative approach (Leigh and others 2010; Abiad and others 2011).

Our results have important policy implications. They suggest that fiscal consolidations in individual euro area countries, especially the larger ones, can reduce aggregate demand in others. The magnitude of cross-country spillovers has strengthened with the economic integration and introduction of a single currency. Also, spillovers can be larger if fiscal consolidations are implemented in downturns. Therefore, individual euro area countries should consider fiscal measures implemented in other members as well as the state of the economy when implementing domestic policies.”

For previous IMF work on negative demand spillovers in the euro area, see my VoxEU blog and Larry Elliott’s column.

Figure 1. Impact on Eurozone output from wage moderation, quantitative easing and structural

From a new paper by Dani Rodrik:

“The resulting system — variably called the Bretton Woods compromise or embedded liberalism was a great success. It fostered a large increase in global trade and investment and saw rapid economic development in both the advanced and developing economies. Perhaps it was too successful for its own good. By the late 1980s, policy makers and economists thought they could make it work even better by pushing for deeper economic integration. Trade agreements became more ambitious and reached beyond the border into domestic regulations. The removal of restrictions on capital mobility became the norm rather than the exception. In the process, the “embedding” or “compromise” that had made the earlier regime such a success was overlooked.

The rise of populism forces a necessary reality check. Today the big challenge facing policy makers is to rebalance globalization so to maintain a reasonably open world economy while curbing its excesses.”

Continue reading here.