Oliver Blanchard, the outgoing chief economist of IMF gives this interview on lessons learnt (both for himself and IMF) and way going forward.
He is joining the Peterson Institute for doing more serious research on the lessons he has learnt over these years. This is really interesting to see. How most US based economists actually look forward to doing more research after holding such high offices. They just join the thinktanks/univs and devote more time to research. In most other countries, we usually see such experts shuttling from one high office to the other. The econs in US wished to be known for their academic contribution and not just some policy hogwash.
Moving to the lessons learnt:
IMF Survey: You have at times pushed the envelope of IMF thinking and policy positions. How has this been received inside and outside the IMF?
Blanchard: It would have been intellectually irresponsible, and politically unwise, to pretend that the crisis did not change our views about the way the economy works. Credibility would have been lost. So, rethinking, or pushing the envelope was not a choice, but a necessity.
The fact that the economic counsellor, or the research department, has a view on a particular topic does not move things very much by itself. An essential part of the job is to convince, or try to convince, the rest of the building, from management to the department desks, of that view. This can be hard work. To treat all countries in a consistent way, the Fund must have a corpus of beliefs, and this corpus is not easily changed. Ideas do not only need to be developed, they need to be sold to the rest of the building. It does not happen overnight.
With respect to outside, the issue I have been struck by is how to indicate a change of views without triggering headlines of “mistakes,’’ “Fund incompetence,’’ and so on. Here, I am thinking of fiscal multipliers. The underestimation of the drag on output from fiscal consolidation was not a “mistake’’ in the way people think of mistakes, e.g., mixing up two cells in an excel sheet. It was based on a substantial amount of prior evidence, but evidence which turned out to be misleading in an environment where interest rates are close to zero and monetary policy cannot offset the negative effects of budget cuts. We got a lot of flak for admitting the underestimation, and I suspect we shall continue to get more flak in the future. But, at the same time, I believe that we, the Fund, substantially increased our credibility, and used better assumptions later on. It was painful, but it was useful.
IMF Survey: In pushing the envelope, you also hosted three major Rethinking Macroeconomics conferences. What were the key insights and what are the key concerns on the macroeconomic front?
Blanchard: Let me start with the obvious answer: That mainstream macroeconomics had taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage equations, under the assumption that we did not need to look at who was doing what on Wall Street. That turned out to be badly wrong.
But let me give you a few less obvious answers:
The financial crisis raises a potentially existential crisis for macroeconomics. Practical macro is based on the assumption that there are fairly stable aggregate relations, so we do not need to keep track of each individual, firm, or financial institution—that we do not need to understand the details of the micro plumbing. We have learned that the plumbing, especially the financial plumbing, matters: the same aggregates can hide serious macro problems. How do we do macro then?
As a result of the crisis, a hundred intellectual flowers are blooming. Some are very old flowers: Hyman Minsky’s financial instability hypothesis. Kaldorian models of growth and inequality. Some propositions that would have been considered anathema in the past are being proposed by “serious’’ economists: For example, monetary financing of the fiscal deficit. Some fundamental assumptions are being challenged, for example the clean separation between cycles and trends: Hysteresis is making a comeback. Some of the econometric tools, based on a vision of the world as being stationary around a trend, are being challenged. This is all for the best.
Finally, there is a clear swing of the pendulum away from markets towards government intervention, be it macro prudential tools, capital controls, etc. Most macroeconomists are now solidly in a second best world. But this shift is happening with a twist—that is, with much skepticism about the efficiency of government intervention.
I think Blanchard could have stressed more on knowing economic history really well. Economic history of not just US but other countries where it preaches homogeneous lessons to really heterogeneous bunch of countries.
These emphasized ideas show nothing but knowing history of economies and economic thought. It is not really economics for the best but keeps telling you how economics is just a set of some common ideas which keep repeating themselves. More humility and less hubris would have kept IMF and other econs rooted and wouldnt have been as shocked as they are seeing the unfolding of the crisis.
The other answers just emphasise the importance of IMF in today’s economy. Some things are meant to not just continue but grow despite serious malfunctioning. One has to wait for a more natural decline to such organisations like IMF. The governments will ensure such places continue as it gives them so much power to intervene and influence their policies.