Free Lunch: Bye bye Blanchard

Δημοσιεύθηκε: 15 Μαΐου 2015 - 11:36

Second thoughts

The International Monetary Fund's chief economist, Olivier Blanchard, is retiring from his position to general acclamation. Blanchard's tenure has coincided with the financial crisis and its aftermath: he took the position in September 2008, weeks before the bankruptcy of Lehman Brothers.

His most important influence has not been on the IMF's crisis management abilities as much as the fund's research activities - its brain more than its brawn, if you like. On Blanchard's seven-year watch, the IMF's research staff has regularly generated eye-catching proposals and surprising findings. This has sometimes tilted the balance of political argument, often overturned the IMF's own previous orthodoxy, and always pushed the global economics debate forward. There is little doubt that this has largely been salutary, and no doubt whatsoever that it has extinguished the threat of irrelevance creeping up on the fund in the mid-2000s. Here is a sampling of what Blanchard and his staff have contributed.

In 2010, an agenda-setting paper honestly took stock of how the previous macroeconomic consensus had fallen short. Its suggestion that central banks should target higher inflation - it mooted a 4 per cent rate - caused the biggest waves. But the paper also covered the big questions that have shaped the macroeconomic policy debate ever since (including in follow-up research by the IMF itself): the active use of what is now called "macroprudential" financial regulation to stabilise economies; the use of unconventional money-printing by central banks even when conventional times return; and restored emphasis on activist fiscal policy and more smartly designed tax and benefit systems to smooth economic fluctuations. Some of these questions form research agendas for the fund - its recent work, for example, shows that better countercyclical fiscal policy boosts growth rates on average.

The research department's acts of intellectual iconoclasm have been all the more striking given the IMF's own totemic role in establishing the earlier consensus. A case in point was the IMF's half-embrace of international capital controls after years of championing financial liberalisation. Further work has followed, suggesting that financialisation may cause more harm than good at a domestic level as well. Another example is IMF research challenging the assumption of a growth-equality trade-off.

Then there is the outright self-criticism. The mea culpa on the effects of deficit cuts in general is widely known, as are admissions of mistakes in specific European rescue programmes such as Greece's and Ireland's (though the latter did not come from Blanchard's department). Less well known is that recent IMF work has cast doubt over some structural reforms the fund continues to demand from its wards.

All this truth-seeking is a good thing. On Blanchard's watch, the IMF has shown more intellectual openness than many other economic institutions. But that is an easy test to meet; and the IMF and Blanchard himself can be held to higher standards still. For all his questioning of orthodoxy, he sticks rigidly to the assertion of a zero lower bound on central bank interest rates even as many have gone into negative territory. And the fund shows no willingness to let heterodox thinking in its research department contaminate its policy making on the ground. With great power comes great responsibility, and the two remain unbalanced at the IMF and elsewhere.