Olivier Blanchard and the IMF in the depression

by Michael Roberts

The G20 group of top economies meets in Turkey this weekend.  For the meeting, the IMF issued an update on the state of the global economy – and the IMF is worried.  It points out that global growth in the first half of 2015 was lower than in the second half of 2014, reflecting a further slowdown in emerging economies and a weaker recovery in advanced economies. Productivity growth has been persistently weak.

So, once again, the IMF has lowered its confidence in global growth, and yet, once again, expects a ‘modest’ pick-up in the 2nd half of this year and into 2016. But apparently the “risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook.”

This G20 meeting was the last for the IMF’s chief economist, Olivier Blanchard, who is leaving to take up a lucrative new post with the mainstream economic think-tank, the Peterson Institute .  Blanchard gave an interview on the IMF blog that outlined his thoughts and reviewed his successes and failures.  French-born Blanchard, a former chairman of the economics department at the Massachusetts Institute of Technology, joined the IMF in 2008 at the height of global financial crash and in the depth of the ensuing Great Recession, just two weeks before Lehman Brother’s bank collapsed.

Blanchard is an eclectic mainstream economist extraordinaire, shuffling between neoclassical and Keynsian ideas as he sees fit,  the perfect economic helmsman for the IMF as the institutional representative of international finance capital.

Blanchard says that “The crisis was a traumatic event during which we all had to question many cherished beliefs…. questioning various assumptions on the role of fiscal policy, including the size of fiscal multipliers, the use of unconventional monetary policy measures and macroprudential tools, capital flows and measures to control them, labour market policies and the role of micro and macro flexibility.“ In other words, everything has been questioned, except the causes of crises in capitalist production and accumulation.

No, that’s not fair. In the interview, Blanchard admits that it “would have been intellectually irresponsible, and politically unwise, to pretend that the crisis did not change our views about the way the economy works. Credibility would have been lost. So, rethinking, or pushing the envelope was not a choice, but a necessity.”

And what was the big rethink?  The big thing for the IMF during the Great Recession and the subsequent weak recovery was the size of what are called the ‘fiscal multipliers’, namely the degree of impact on economic growth and unemployment from imposing government spending cuts and tax increase to balance government books and reduce public debt in the middle of a major slump – the degree of ‘austerity’.  Blanchard is convinced that the fiscal multipliers are underestimated in a world of ‘zero-bound’ interest rates when monetary easing has little or no effect.  Correcting this was a great achievement of the IMF under his economic leadership.

The problem is that there is much counter-evidence that the fiscal multipliers are not much larger in recessions – in other words, the slump was not really a product of ‘too much austerity’, but of something else.  Anyway, even if Blanchard noticed that fiscal austerity made the slump worse than it might have been, did he advocate more fiscal spending by governments then?  No, he did not.  He just hinted that governments should not be so harsh.  That’s it.

The other thing that Blanchard reckoned where he ‘made a difference’ was in the Greek bailout discussions.  The IMF recognised that it had made a mistake in the first bailout in 2011 in not insisting on debt restructuring so that Greek public debt became sustainable.  They kept quiet about that.  Blanchard claims that “it made good sense to argue for debt relief first in private. We did. And when we thought our argument was not getting through, it made good sense to then go public.”  In future, the IMF would insist that private sector creditors (banks etc) also take a hit when restructuring public debt for a ‘distressed’ government wanting IMF ‘aid’.  Bit too late perhaps!

In the interview, Blanchard was also keen to emphasise that he had initiated discussions among mainstream economists about the nature, causes and remedies for the Great Recession and the Long Depression (as I call the weak recovery) afterwards.  He had launched three Rethinking Economics conferences under the auspices of the IMF.  And what did the great and good of assembled macroeconomists conclude?

Well, it was caused by naughty reckless bankers causing a financial panic (Ben Bernanke) or ‘financial shocks’ (David Romer) or it just happened (“my view is that it’s as if a cat has climbed a huge tree. It’s up there, and oh my God, we have this cat up there. The cat, of course, is this huge crisis. And everybody at the conference has been commenting about what we should do about this stupid cat and how do we get it down.”  said George Akerlof husband of current Fed chair Janet Yellen)!  At the time, Blanchard concluded that “we have a general sense of direction, but we are largely navigating by sight.”  By this, I think he really meant that economists are navigating blind, as there was no theory of what direction to take!  Indeed, Blanchard sums up: “There is no agreed vision of what the future financial architecture should look like, and by implication, no agreed vision of what the appropriate financial regulation should be.” In other words, no vision at all.

As Blanchard stated in the IMF interview: “The financial crisis raises a potentially existential crisis for macroeconomics.” Indeed!  He reckoned that mainstream economics must start to draw on old ideas from heterodox economics, namely “Hyman Minsky’s financial instability hypothesis. Kaldorian models of growth and inequality.” And even policy “that would have been considered anathema in the past are being proposed by ‘serious’’ economists: for example, monetary financing of the fiscal deficit.”  Also “some fundamental [neoclassical] assumptions are being challenged, for example the clean separation between cycles and trends” or “econometric tools, based on a vision of the world as being stationary around a trend, are being challenged.”

But it’s a mix for Blanchard: sticking to the mainstream and drawing on a few heterodox views about the damage caused by a debt-laden financial sector (Minsky) or rising inequality (Kaldor and, of course, now Piketty and Stiglitz).  Naturally, it goes without saying that the ideas of Marxist economics, of an irreconcilable contradiction between growth, employment and profitability under capitalist production is not part of Blanchard’s wider encompassing of ‘old ideas’.

Blanchard reckons that the experience of the Great Recession and Long Depression have led to “a clear swing of the pendulum away from markets towards government intervention” but “with much skepticism about the efficiency of government intervention”.  Well, he could have fooled me that mainstream economics and governments want more government and less markets.  And maybe the mainstream is right that government intervention won’t work anyway in restoring an economy – look at quantitative easing as an innovative monetary intervention.

As for the future, Blanchard hedges his bets.  It seems that the advance capitalist economies are going to suffer much lower growth “There is a good chance that we have entered a period of low productivity growth. There is a chance that we have entered a period of structurally weak demand, which will require very low interest rates.”  This is bad news for the strategists of capital, for which he is a leading economic consultant, as “low growth combined with increasing inequality, is not only unacceptable morally, but extremely dangerous politically”.

Blanchard offers no explanation about why market economies around the world are slowing down and delivering lower productivity growth and rising inequality.  But it is a moral dilemma, and even more worrying, ‘politically dangerous’ to capitalism.

So what does Capital do?  As Blanchard heads for his new job, he concluded that “there are no magical solutions: We have to be realistic as to what structural reforms are politically feasible, and what they can reasonably achieve.”  Great.