The theoretical revolution of Blanchard, the negotiations between Greece and creditors, the role of fiscal and monetary policies, the fate of the eurozone. Francesco Saraceno, an economist at the prestigious Italian Observatory on the economy (OFCE) in Paris, responds to all-out in an interview for Keynes blog.
Let’s start from your article on the recognition of the “errors” of the IMF, allowed by Blanchard, its chief economist (correlation between deregulation of the labor market and growth, impact multipliers, and so on). Paul Krugman recently returned just that your work on his blog . The body of doctrine IMF seems short cracked in several places. The self-criticism of Blanchard are, in your opinion, an incidental mea culpa without consequences, or can we expect a new era in economic policy?
No, I do not think a hiccup . I believe that a paradigm shift is beginning to take shape. Some were skeptical of the “revisions” I aligned, reiterating that in essence, the IMF does not change its modus operandi, despite the theoretical course corrections. See for example the attitude of the fund in the Greek question. In reality, things are more complex, and right in the case of Greece, the IMF has also played the role of “good cop”, admitting explicitly that the debt of Athens must somehow be restored.
on the other hand we must not forget that Blanchard is the Executive Director of the IMF, but the head of his center studies: its actions reflect the objective difficulties that the Washington Consensus has met over the past decade, especially after the crisis of 2008. I think, as I said in that article, that realism has imposed to review some of the cornerstones of economic policy doctrine that dominated Europe in the twenty years from 1990 to 2010, and the rest of the world since the early eighties.
In addition to course corrections on austerity and expansive on multipliers – corrections consensual and hardly questionable in a context as extreme as that of the crisis -, I think are also the most important novelty of growth the long-term. The first is to recognize that not all liberalization are equal, and that in particular the labor market does not produce the effect that the theory predicts. The second is to admit the unsustainability of the dichotomy between redistribution and economic efficiency: a society in which income is distributed in an increasingly unequal is not intended for long-term growth and sustainable.
These are two fundamental pillars the Washington Consensus , which are beginning to fall apart.
The quality of the adjustment in place seems to me to be seized with a tangible change of fiction . If you change the narrative, I believe is justified also hope a change in economic policy. The IMF had until recently an intellectual discourse which implied precise policy prescriptions. While these requirements have not yet changed, the “discourse” is now radically different. The recipes so far applied gradually lose their theoretical foundations.
Each paradigm shift in economic policy needs a paradigm shift intellectual quote. And although it is too early to determine the limits and consequences, I think that Blanchard has initiated a paradigm shift intellectual.
This “new” can perhaps be placed in a well-defined historical-political context: the economic policies of the United States in time of crisis have been much more vital and effective than in Europe …
This difference of approach does not date from today. My co-author Fitoussi said that the United States are the largest producers in the world of liberal thought, but not for domestic consumption, mainly for exports. The framework of political and social institutions, but also economic, the US is much less protective than the European (the welfare state is much less developed) and this goes hand in hand with an activist economic policy much more marked. It is not conceivable without social safety nets and a mechanism in which policy is inert, because it would not be able to absorb economic fluctuations. Europe had in the past not need active policies because he had a system of social protection much more developed. The weakening of the welfare state, which we witness in Europe would therefore require a much more rapid reaction capacity of public policies. But that’s not what we’re doing.
The resignation of Blanchard – who announced to leave prematurely its mandate – are in your opinion the light of disagreements deeper?
I do not think; I think there’s been a good harmony between Blanchard and directors of the IMF (Strauss Kahn, then Lagarde). It is personal choice: she lived seven years on the edge of the precipice, I want to take a little ‘time to devote serenely research and studies. It was recently interested in secular stagnation, and I imagine you want to develop this theme of study. He has mobilized a group of researchers of value on important issues driving them to shed their blinders. It is a working group that will continue on the path laid out.
Let’s talk about monetary policy at international level, and more generally of the “liquidity trap”. The Bank of Sweden has set a negative discount rate from January; Japan is a very aggressive monetary policy. There is a feeling that it had to come to the threshold of deflation, at least at European level, to review your choices until yesterday intangible. The ECB has finally launched the QE, long-awaited and perhaps inevitable. Nevertheless, it is feared by many that the QE ends to fuel speculative bubbles if there is a plan for industrial investment. There are spaces because the QE also push to a new round of industrial investment, or did that come about running for cover than the fear of deflation?
Revisiting Keynes we realize that nothing what’s going on is amazing. The definition of the liquidity trap is that according to which there is, in a certain time and for various reasons, a high propensity of the private sector to absorb liquidity without spending; in a situation like this, it is absolutely normal that an expansionary monetary policy has a direct impact on economic activity. Who is surprised that QE has not relaunched the economic activity (in Europe, Japan or the US) does not know the economy.
So why launch the QE, especially in light of the risks of bubbles on assets? I see three reasons, two “good” and “bad”. The first is that you must have enough cash to avoid being unprotected at the time of shooting. The second is that the QE allows moderation rates on securities of sovereign debt of the peripheral countries of the euro. The third reason is that QE has a positive effect on competitiveness as it acts on the exchange rate: the Fed allowed, weakening the dollar to promote exports. This goal, however, seems less far-reaching than the other two, because a strong economy should be based mainly on domestic demand rather than exports.
Despite the positive intent of these addresses, in the presence of a trap liquidity of the real lever for the revival of economic activity – Keynes docet – fiscal policy. This is where policies diverge EU, US and Japan: in Europe, in 2010, was abandoned any expansionary fiscal policy, and started to reverse in a narrow work expenses, aiming for an increase in revenue (fiscal consolidation). The absence of a fiscal stimulus worth his salt largely explains the differences in economic performance between Europe and the US or Japan.
Obviously this is a fiscal stimulus that is limited in time to be effective. The United States has applied fiscal policies during the crisis which were promptly rescheduled when private spending has returned to higher levels. It is an elastic compensation, for which the public sector enters the economy when the private system is lacking, and retired when the private sector is ready to return. You can discuss the timing of the recovery plan of Obama. You probably changed the fiscal stance too soon, when private spending was not yet strong enough. If Congress had not been in the hands of the Republicans and if Obama had been a little ‘more strong-willed, he would perhaps left more room for the strengthening of the recovery. But all in all it’s aspects marginal. The fact remains that the US fiscal policy has done its duty.
This is the basic principle of a cyclical economic policy …
It was to the original spirit of the proposal of Keynes. Contrary to what I think many conservatives, not Keynes advocated a big government , but active government ; It is what happens in the US, because there is no system of automatic stabilizers rooted, as the European welfare state. The real question in Europe – still unanswered – is that fiscal policies, much more than monetary. The ECB works in this framework, and its action it is inherently limited: I’m sure would be happy Draghi not to do what he’s doing. But he can not say. And if he had been less active today, the euro zone would no longer exist.
In the fiscal policies can be seen in Europe a few exceptions, there is any government that is trying to raise his head?
No, no. Here among other lies the greatest hoax of the Italian political debate: on this side Renzi is not changing anything. The fiscal stance varies between neutral and recessive. It is true that the Germans are – with extreme reluctance – introducing some changes, I think in particular the minimum wage; one can hope for a recovery trend in domestic demand, but far from sufficient to offset the imbalances which have occurred so far. The peripheral countries remain in a full fiscal inertia, some more deliberately (Spain and Portugal) or less (Italy). But overall there is no ability or willingness to act in this area, we are in a context of fiscal policy is not aggressive. It’s the most depressing lesson of the negotiations this time: Europe has not changed to. Not even a little ‘.
It is no coincidence that the ongoing negotiations between Greece and “institutions” seem to run aground on its requests for increase in VAT, by definition the ‘sets that most harms the domestic demand. What is your appreciation of the current negotiations?
Beyond the detail of the measures debated (circulating at this time various assumptions, and it is difficult to define the contours of the agreement if any), I It can feed, in the story of the Greek deal, a moderate optimism. Since the beginning of the negotiations it seemed that there were a real problem, and one false, “facade”. The false problem is debt, because everyone knows that Greece will repay its public debt (the repayment of which there is indeed a moratorium). And this is not the problem is equally known to all, because these figures – the European scale – insignificant: the greek debt amounts to about 2% of EU GDP. On this false problem it focused all the attention.
Then there is the real problem, on which some progress has been made: the recognition that recessionary policies are no longer justified nor sustainable. Greece had suffered – with the consent of the conservative governments and pro-austeritari – a repayment plan for the debt manifestly inapplicable, with strokes of primary surplus of the order of 3-4%. On this there was a consensus between Greece and the creditors, and is a point on which no one dares to insist. I think the greek government, and the Minister of Finance in particular, has been very adept at this point. Varoufakis deliberately continued to distract the public and negotiators with the issue of debt, while the central theme was the goal of primary surplus, on which it is able to obtain important concessions [in the document of February 20, cites the " adequate primary surplus ", and the assumptions on the table are less than 1% for 2015].
A more realistic goal of primary surplus allows new leeway for fiscal policy to help the recovery. If the hypothesis that circulating materialize, Greece would abandon fiscal policies catastrophically recessive to position the cursor, if not in positive territory, at least next to neutrality. This would be great news. Somehow the government greek would be the first, emblematic exception inertia of eurozone governments were talking about before.
The moderate optimism is tempered, however, by the insistence of the troika on some symbolic measures on which the Greece can not give in, at risk to derail the negotiations. I think in particular to further cuts in wages and pensions. In light of the considerations with which we began our conversation, this insistence has the feel of a late adherence to Berlin and Brussels in the Washington Consensus that oltreatlantico is now moribund. Paradoxes European …
We cross – at least in Europe – a period of unemployment with deflation, a field in which the classical Keynesian theory is comfortable (comfortable theoretical, of course). Very different situation from the ’70s stagflation, which greatly contributed to the crisis – theoretical and practical – policy demand. In this framework, there are in your opinion the conditions for convergence of the different schools Keynesian? Perhaps with areas of non-mainstream, or anti-neoclassical?
I’m afraid not, because I think outweighs the size of self-certain intellectual circles. But I believe there is now a chance to counter the classical theory standards, supply-side; without necessarily enforce against a unified theory (goal too ambitious), but with multilateral approaches. Personally I am very interested in the reflection on the “secular stagnation”, which explains how there might be an equilibrium of under-employment in the long term, the combined effect of supply and demand. This balance can be analyzed from the “slowdown” of technological progress, or by demographic trends (in neoclassical perspective, the Solow); or from the distribution of income, the excess of savings (in a more progressive, demand-side).
Today the conditions are right to challenge the theories and economic policies of the Washington Consensus , showing that the ideal world of market balances “automatic” has nothing to do with reality, and that supply and demand can be balanced in regime under occupation in the long run. This means that we need to implement policies not neutral.
If you ask me if this will happen because you put all agree: neo-Keynesian, post-Keynesian, post-post Keynesians, Marxists, Kaleckian … the answer is that I have my doubts. But there is room for a definitive overcoming of the mainstream theory, which will be replaced by a multipolar world intellectually. It not necessarily is a bad thing.
This poses a recurring issue and delicate in the history of progressive thought in general have more weight the balance of power or social representations intellectuals that the policy creates for act on them? It also happens that the dynamics overlap: 1936 is the year in which Keynes writes the General Theory , but also one in which Leon Blum establishing paid holidays and the 40-hour week, the result of a extraordinary social pressure.
I believe that the changes take action when alongside contributions of different kinds. Citavi Marxist thought. In the analysis of secular stagnation, the analysis of Marxist plays an important role: to call into question the approach “individualistic” of neoclassical theory, which relies on the agent all rational, able to optimize, and reconsider the role instead of classes , the balance of power, the emergent properties , (ie social dynamics not related to a “representative agent” or to a hypothetical individual behavior) leads a potentially very rich contribution to this debate. I could not say, however, how easily will overcome some “compartments” between the different critical trends. The battle to export certain ideas outside of specialist areas is still long.
In light of the current tensions over Greece, is to be hoped that they are to influence events theories, rather than the other …
Yes, I believe that today – as in the ’30s, and as in Europe describing Marx – emergence of the contradictions in the system and in the theories that justify. Contradictions that impose an afterthought, but not necessarily to ditch all the chapters of the neoclassical theory. I do not consider it absurd that the long-term supply factors play their role. Nor that a neoclassical economist noted that productivity in Greece today is insufficient.
Productivity is a typical example of a parameter that can be read in a neo-classical, but also, and in a completely different vein, in Keynesian perspective …
In fact, it can hope to increase without adding the corollary of “structural reforms”, but for example by promoting investment in research, quality of training, and so on. Germany itself, which presents itself as a champion of neo-classical virtues, is actually far from that model has a banking system very little transparent, strong unions and consociational, and so on. It is a model which as a whole is rather far from the paradigm of the free market, but that has its own effectiveness. You can have a high level of productivity, without obeying the requirements of the ideal economic conservative. Indeed, some economists as Sebastien Dullien notice as the Hartz reforms have had the effect of introducing cracks in the powerful, and efficient machine consociational German. If Dullien is right, in a few years we may find ourselves talking about the failure of the German economic model.
Varoufakis all’Ambrosetti has revived an analysis of Kaldor 1971: a monetary union It will be unsustainable without a political tool of the continental level. We can not afford an independent central bank beautifully, without instruments of taxation, and no guidelines on economic policies, which would be granted to a single government. His proposal is to act within the existing treaties by funds of the European Investment Bank, covered by the ECB, without directly funding states. In your opinion is an effective way to offset the current account imbalances within the euro?
Among the important contributions of neoclassical theory is precisely the independence of monetary policy as a factor stability of the economic system. In this sense, the context of the proposed Varoufakis a premise: I do not think that the problem is much too much “independence” of the ECB, but rather the absence of a government that balances properly (without reaching a “political control” ). The Fed is independent, but has a weight that is the party Congress. It is an essential difference compared to Europe. I quote an article by Roberto Tamborini a few years ago, about the eurozone: “A giant monetary and fiscal twelve dwarves”.
The problem is here: an actor of weight that deals with money, no partner. Draghi could paraphrase Kissinger and say “give me a phone number, and call them.” For now he has that of Merkel. The ideal solution – I think today many will agree – would be a federal state, but the political conditions for such a level of understanding all missing. You must then create some ersatz that the replacements, and in this sense the proposed Varoufakis is interesting, and worth far more than a provocation. It remains to define who would manage these investments, and by what criteria, but I think both viable and ambitious.
The role of fiscal policy is twofold: first of all stabilize the economic cycle, where the monetary policy reach. In Europe, a single monetary policy can not necessarily handle asymmetric cycles; It can not intervene in the case of a boom in Spain and a simultaneous recession in Germany. The ideal would be a federal system (with withdrawals and expenditure at the federal level), acting in the sense of automatic redistribution of revenue: the classic example is that – evoked by Krugman – Florida who with his taxes “helps” him state of New York in recession. In the absence of these mechanisms, one can imagine different solutions, but with the same purpose. For example, the European Commission proposed in November 2013, the establishment of the European dole, that could play in this direction: countries with more unemployed perceive more, while the countries with the highest employment rates more time paying funds. A smoothing indirect, similar to that tax. Even the delivery of structural funds linked to the phases of the economic cycle – albeit with a more complex approach – can operate in compensation of a unique system of withdrawals.
Second, fiscal policy can foster development long-term: public investment, the Structural Funds, to compensate for the differences in development between different areas of the continent. The proposed Varoufakis fits into this second strand. It remains to be seen how to prioritize and choose the projects that the EIB would finance. Juncker has chosen to avoid such an approach to “country fee” – which is in principle a good idea. The risk, however, is that “good” projects (for performance, goals, risks) arise more easily in areas already advanced economically, or with a solid infrastructure, which in the peripheral regions. And that might accentuate differences.
In short, for those who are able to come up with substitutes, the absence of a federal government will always be a handicap.
The blog of Francesco Saraceno is fsaraceno.wordpress.com | Twitter fsaracen or
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