IMF Panel: Fiscal Policy in the New Normal: (Partial) Transcript

I am (slowly) getting a cleaned-up transcript of this Bank-Fund Meeting cycle’s panel on “Fiscal Policy in the New Normal”:

Moderator: Vitor Gaspar. Panelists: Mitsuhiro Furusawa, Brad DeLong, Bill Morneau, Ludger Schuknecht, Arvind Subramanian

OVERVIEW: The global recovery has been anemic and future prospects have dimmed. Monetary policy has been stretched to extremes with quantitative easing and zero interest rates, yet investment remains subdued and deflationary pressures linger. Waning productivity, growing income inequality, and the longer-term implications of shifting demographics have led to repeated markdowns of medium-term growth potential. Should there be a pivot toward new ways of thinking about fiscal policy in a “new normal” of prolonged slow growth, in terms of both its countercyclical role and its effectiveness in boosting productivity and catalyzing longer-term inclusive growth?

VITOR GASPAR: Please take your seats. Good morning. Welcome to this panel discussion on fiscal policy in the “new normal”. I invite the audience to follow the event on Twitter; you can use the hashtag #IMFFiscal or #IMFMeetings. Both work.

I am very honored and pleased to have such a panel today to discuss fiscal policy. It is definitely very topical–we’re living in fiscal times. I expect the discussion to be very lively. Interventions will be short, brisk, and to the point. I expect the panelists to have views that, on occasion, will not coincide; and we will try to understand why that is the case. And so: what are the most important concentrations for fiscal policy in this “new normal”?

I am really privileged to have this fabulous panel today. On my left side I have Professor Brad DeLong. He is a professor at Berkeley, he is a colleague of our chief economist, he has one of the best websites on macroeconomic policy in general and fiscal policy in particular.

To the left of Brad we have Arvind Subramanian, chief economic advisor of the government of India. He is very well known here because he had a very distinguished career at the IMF as well as the Patterson Institute, and he is coming from one of the most dynamic economies of the world where public finance is transforming itself most rapidly.

And then we have the Minister of Finance of Canada Bill Morneau. And Canada has been pushing outward the envelope of best practices when it comes to fiscal economy, so we have a lot to learn.

And then my friend Ludger Shuknecht—we worked today at the European Central Bank. And as I was saying before, at the ECB Ludger was the fiscal man. The point is that obviously I was not.

Then we have our own Deputy Managing Director Furusawa, who has joined this role only recently, but he has a very distinguished career, both internationally and in Japan, most recently as an advisor to the Japanese Prime Minister.

Now let me address you at this time: we will have time to interact at the end, so please collect your thoughts on fiscal policy and be prepared, when time comes, to trigger your questions and interact with the panel.

Now let me just say a few words about what we mean by the “new normal”. What we have in mind is that the current macroeconomic situation is characterized by slow and shallow economic recovery after the global financial crisis, and we emphasize that without policy action it may well stay that way. That is what the Managing Director calls “the new mediocre”. And policy action is required to prevent “the new mediocre” from materializing.

The second element of this combination is that monetary policy in many advanced economies is very close to the effective lower bound, and inflation is too low, and investment remains subdued.

The third aspect is that fiscal policy is constrained by high levels of public debt in many advanced economies and some diverging market economies. And last, but not least, we have low productivity growth and growing income inequality in many countries; and that is a very hard combination, particularly if you have unfavorable demographics.

So the question for this panel is: do these characteristics of a “new normal” or perhaps the danger of a “new mediocre” require a different approach to fiscal policy? How should fiscal policy respond to this change? How it should behave at business cycle frequency? How can it foster long-term growth? And those questions are questions that of course are going to be answered with clarity by our panel.

But it will take a few minutes. So let’s start off immediately. And I will approach first, Brad, if you allow me. So in your opinion, and tell me from an academic viewpoint, has academic thinking about countercyclical fiscal policy changed recently?

BRAD DELONG: I would not say that thinking has changed. I would say that there is a good chance that thinking is changing. If so, it is as a result of a whole bunch of extraordinary surprises that have hit us all.

Back in 2007 we thought we understood the macroeconomic world, at least in its broad outlines and essentials. It has become very clear to us since 2007 that that is not the case. Right now we have a large number of competing diagnoses about where we were most wrong. We clearly were very wrong about the abilities of major money center banks to manage their derivatives books, or even to understand to understand what their derivatives books were. We clearly did not fully understand how those markets should be properly regulated.

Right now, however:

  • We have people who think the key flaw in the world economy today is an extraordinary shortage of safe assets. Nobody trusts private sector enterprises to do the risk transformation properly. Probably people will not again trust private sector enterprises for at least a generation.

  • We have those who think the problem is an excessive debt load where–I think we should distinguish between debt for which there is nothing safer, the debt of sovereigns that possess exorbitant privilege, and all other debts.

  • We have those who think we are undergoing a necessary deleveraging.

  • We have those who look for causes in the demography.

  • And then there is Larry Summers, as the third coming of British turn-of-the 20th century economist John Hobson. (The second coming was Alvin Hansen in the 1930s.) And the question: just what is Larry talking about?

    • Is Larry talking about the inevitable consequences of the coming of the demographic transition and of the end of Robert Gordon’s long second Industrial Revolution of extremely rapid economic growth?

    • Or is he talking a collapse of the ability of financial markets to do the risk transformation–to actually shrink the equity risk premium from its current absurd level down to something more normal?

If you look at asset prices now, you confront the minus two percent real return on the debt of sovereigns that possess exorbitant privilege with what Justin Lahart of the Wall Street Journal was telling me yesterday is now a 5.5% real earnings yield on the U.S. stock market as a whole. That 7.5% per year equity premium is a major derangement of asset prices. It makes it very difficult for us to use our standard tools to think about what good policy would be.

VITOR GASPAR: That’s excellent as a start-off. Ludger, could you give us the German perspective on the same question? Has fiscal policy evolved recently, and if so, how?

Moderator: Vitor Gaspar is Director of the Fiscal Affairs Department at the International Monetary Fund. Prior to joining the IMF, he held a variety of senior policy positions in Banco de Portugal, including most recently Special Adviser. He served as Minister of State and Finance of Portugal from 2011– 2013. He was head of the European Commission’s Bureau of European Policy Advisers from 2007–2010 and director-general of research at the European Central Bank from 1998 to 2004.

Mitsuhiro Furusawa is Deputy Managing Director of the International Monetary Fund. Mr. Furusawa joined the IMF after a distinguished career in the Japanese government, including several senior positions in the Ministry of Finance in recent years. Immediately before coming to the Fund, he served as Special Advisor to Japanese Prime Minister Shinzo Abe and Special Advisor to the Minister of Finance.
Brad DeLong:

Brad DeLong is a Professor of Economics at the University of California, Berkeley, a research associate of the National Bureau of Economic Research, and a blogger at the Washington Center for Equitable Growth. DeLong served as U.S. Deputy Assistant Secretary of the Treasury for Economic Policy from 1993 to 1995.

Bill Morneau is Canada’s Finance Minister. Previously, he led Morneau Shepell and was Pension Investment Advisor to Ontario’s Finance Minister. He is a former chair of the C. D. Howe Institute. He holds an MSc from the London School of Economics and an MBA from INSEAD.:

Ludger Schuknecht is Chief Economist at the German Ministry of Finance, and head of the Directorate General Fiscal Policy and International Financial and Monetary Policy. In his previous position as Senior Advisor in the Directorate General Economics of the European Central Bank, he contributed to the preparation of monetary policy decision making and the ECB positions in European policy coordination.

Arvind Subramanian is the Chief Economic Advisor to the government of India. He was Assistant Director in the Research Department of the IMF, served at the GATT, and taught at Harvard University’s Kennedy School of Government and at Johns Hopkins School for Advanced International Studies. In 2011, Foreign Policy Magazine named him one of the top 100 global thinkers.


Brad DeLong


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