Whose are the ruling macroeconomic ideas?
It is now six years since Olivier Blanchard called for “outlining the contours of a new macroeconomic policy framework”. Yet what is that framework? Where is it? Who outlines it? And what processes will give it political traction?
Looking back to 2010:
Rethinking Macro Policy: “The global crisis forced economic policymakers…(2010):
…to react in ways not anticipated by the pre-crisis consensus…. Here the IMF’s chief economist and colleagues (i) review the main elements of the pre-crisis consensus, (ii) identify the elements which turned out to be wrong, and (iii) take a tentative first pass at outlining the contours of a new macroeconomic policy framework…
You can argue that the elements of such a framework are there. But they are disassembled, lying on the ground, disconnected. And as far as political traction, they are next to nowhere.
I am ending my invited lectures these days with this:
It is traditional to close lectures like this with Keynes’s “madmen in authority” quote:
Is the fulfilment of these ideas a visionary hope? Have they insufficient roots in the motives which govern the evolution of political society? Are the interests which they will thwart stronger and more obvious than those which they will serve?
I do not attempt an answer in this place…. But if the ideas are correct… it would be a mistake, I predict, to dispute their potency over a period of time…. The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas….
There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
Yet when I look around, I see lots of ideas with a potency that is extremely great but with influence that is nowheresville.
The ruling ideas are not those of “academic scribblers”. They are, rather, much simpler. At the moment I count five:
- The bankers have us by the plums…: Thus it is important to cosset, coddle, and enrich our bankers, because only if they are confident will the engine of financial intermediation that is the only thing that can create a booming full-employment economy run smoothly.
Debt is bad (except when it is used to fund tax cuts for “job creators”)…: Hence it is important to cut Social Security and make sure that not an extra drop is spent on public infrastructure.
Today’s extremely low interest rates must be unnatural…: Hence they need to be reversed and monetary policy “normalized” as quickly as normalization can be accomplished without renewed recession.
Only pain can drive reform…: Hence boosting employment and restoring fast growth would be bad as it would impeded the essential process of actually undertaking the badly-needed “structural reforms”.
We couldn’t have done any better…: The most urgent economic problems of the North Atlantic aren’t the standard ones of too-little “money” (of various kinds) chasing a normal amount of goods, but are complicated and irresolvable.
If the ruling ideas were those of Bagehot, Kindleberger, Keynes, Friedman–even a Hayek–we could do something, although in the last case it would take a lot of intellectual ingenuity to make a silk purse out of that particular sow’s ear. But the ruling ideas are barely ideas–they are, rather slogans. The bipartisan technocratic policy center of politicians who listen to arguments about what policies might actually work is gone–or at least paralyzed. And too many key levers of power are held by a right–in Germany, in Britain, and in the U.S.–that appears profoundly uninterested in argument abut policy effectiveness, if not uninterested in policy effectiveness itself.