There were three posts yesterday. The first was “
Janet Gornick, Branko Milanovic, and yours truly will be talking about LIS and what it does Tuesday, October 6th, 2015, 11:30 a.m. to 12:30 p.m. It will be in the Skylight Room at the Graduate Center, 34th and 5th Avenue. More information here.
I’ll bet that’s what happened to the late and much lamented B. Altman & Co. Yesterday’s second post was “The Blanchard Touch:”
Steven Pearlstein has a very nice profile of Olivier Blanchard, a world-class macroeconomist who went on to become an even more towering figure as chief economist at the IMF. (Full disclosure: Olivier and I were in grad school together — we worked out the analytics of anticipated shocks on the lunchroom table together — then were colleagues at MIT for many years.) Under Olivier’s leadership the IMF research department became a huge source of important work that was both intellectually bracing and extremely relevant to policy. And I thought I might add a bit to the profile by talking briefly about one line of that work, the IMF’s ground-breaking empirical analysis of fiscal policy.
Back in early 2010 policymakers in Europe, and some politicians in the United States, went all in for the notion of “expansionary austerity”, the belief that slashing spending in a depressed economy would actually increase demand by inspiring confidence. This view was allegedly supported by statistical evidence, although it was fairly obvious that this evidence was weak, that the statistical procedures being used to identify episodes of austerity and stimulusdidn’t actually work. But the world badly needed a careful examination of the facts.
The IMF delivered, showing that the measures of austerity used in expansionary austerity papers were indeed badly flawed; the Fund used actual changes in policy, and found that austerity has indeed been contractionary.
How contractionary? Initial estimates suggested a multiplier of around 0.5, and that’s what the Fund went with in much of its policy analysis, even though many of us warned from the beginning that the multiplier was probably much larger with interest rates at the zero lower bound. When the slumps in debtor countries proved much deeper than forecast, Blanchard and colleagues, enormously to their credit, revisited the issue and concluded that they hadunderstated the adverse effects of fiscal contraction. This was a wonderful thing to see, especially in a world where almost nobody ever admits having been wrong about anything. And it came in time to have a useful effect on policy, if policymakers had listened, which they didn’t.
But doesn’t government spending crowd out investment, so that austerity may be bad in the short run but good in the long run? No, said the IMF in yet another crucial analysis, which said that fiscal policy appears to produce crowding in, not crowding out — an economy weakened by austerity will invest less, not more.
And there’s more, like the IMF’s use of interwar data to assess the chances for successful debt reduction via austerity. (Not good.)
I’m sure I’m missing stuff. But the point should be clear: the Blanchard era at the IMF was one of unprecedented data-driven analysis of policy problems, done with consummate skill.
The last post yesterday was “Puzzled by Peter Gourevitch:”
Peter Gourevitch has a followup on politics and economics that leaves me, if anything, more puzzled about what’s going on.
He notes that
The fundamental point is that the Federal Reserve is not a seminar. It is not only about being “serious” or “smart” or “finding the right theory” or getting the data right. It is about a political game of balancing between multiple forces of pressure: the people inside the Fed Committee; Congress and the president, who make appointments and set budget and powers; political parties aggregating various ideas and interests to capture political office; interest groups who lobby hard one way or another; the media which helps or hurts one side or another, markets which respond with their various forms of power, foreign governments and countries.
But how does that differ from what I’ve been saying? If you read the column that I think motivated his original piece, it was all about trying to understand the political economy of a debate in which the straight economics seems to give a clear answer, but the Fed doesn’t want to accept that answer. I asked who has an interest in tighter money, and has ways to influence monetary policy; my answer is that bankers have the motive and the means.
And when he says that “his ideas about this broader context enter his columns perhaps once every six months,” I guess I have to conclude that he isn’t reading the columns very carefully. I talk all the time about interests and political pressures; the “device of the Very Serious People” isn’t about stupidity, it’s about how political and social pressures induce conformity within the elite on certain economic views, even in the face of contrary evidence.
Am I facing another version of the caricature of the dumb economist who knows nothing beyond his models? Or is all this basically a complaint that I haven’t cited enough political science literature?
I remain quite puzzled.