Friday, November 15, 2013

The IMF’s Fourteenth Jacques Polak Annual Research Conference – Some Observations

Last week, the IMF held its annual research conference, which was open to members of the public who registered prior to the conference as guests. I attended the two-day conference and have a few observations.
One of the striking things about this conference was the concern about unemployment, especially long-term unemployment and youth unemployment. The worry is that these factors can cause long-term damage to the economy. One paper by three Federal Reserve Board staffers, including David Wilcox, Director of the Division of Research and Statistics and former Treasury Assistant Secretary for Economic Policy during the Clinton Administration, got particular attention in this regard. The paper – “Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy” – is technical but its conclusions after reporting on model simulations are not reassuring. It argues that the “natural rate of unemployment” has increased and that potential GDP decreased by 7% in the wake of the financial crisis. During the seminar, Wilcox indicated particular concern about unemployment. In his New York Times column, Paul Krugman, who gave the keynote speech at the conference, called this paper the “blockbuster” of the conference.

There was also consideration of what the government should do about an economy mired in a slower than desired recovery. Stanley Fischer (the former head of the Israeli Central Bank, the former deputy head of the IMF, and a renowned economics professor at MIT), who was the honoree of the conference, said that the next revision of his textbook will say that the “zero-bound” does not mean that monetary policy is done, since Bernanke has had some success with quantitative easing. Larry Summers and others indicated that QE has not been enough. The obvious implication is more aggressive fiscal policy, which was more clearly embraced by some speakers than others. I did not hear much deficit hand-wringing, though. Given its history, it is somewhat surprising to hear this at the IMF. It is nice to see people taking to heart the famous statement attributed, perhaps falsely, to Keynes that, when the facts change, he changed his mind.

The last session at the IMF conference included talks by Stanley Fisher and three of his former students – Ben Bernanke, Larry Summers, and Ken Rogoff. Summers' speech was particularly interesting and it was the most entertaining talk I've seen him give. He seemed less constrained in what he said since he is not currently a candidate for any public post. He got a laugh from the IMF staffers in the audience when he suggested that there be a key they could hit when preparing an IMF country report which would insert at the end a statement to the effect that, whatever was being proposed for the near-term, long-term financial prudence in government budgets was, of course, of the utmost importance (or something like that). 
An amusing aspect of the conference was that an author would discuss his or her paper and it would all sound perfectly reasonable. Then, sometimes, the discussant would declare that he or she found the paper very interesting and learned a lot from it. But then sometimes the discussant would next politely but effectively demolish the paper by saying that it was based on too many simplifying assumptions and did not take into consideration x, y, or z. The discussant would conclude by saying that the authors should come up with something akin to a unified field theory (okay, those are my words) on the particular issue they were working on. This would leave the audience on a barren plain, with no guidance about where to go or what to think.

What was missing during the conference was much discussion of the links between economic distress and political developments. I can understand why the Fed and the IMF would want to steer clear of any such discussion, but it remains the case that political developments can affect economic performance and economic performance can affect politics. Severe economic developments can spur groups both on the left and the right. Sometimes this can lead to disastrous consequences; sometimes these movements fizzle out. It depends both on the circumstances and the political culture of a particular country. In the U.S., the rise of the Tea Party is partly due to hard economic times. My guess is that this movement will eventually fizzle out. But how long can countries in the European "periphery" be subject to austerity measures and high unemployment without negative political ramifications? After all, some of these countries were dictatorships not that long ago.
Complicated econometric techniques would not be that useful in looking at the political dimension of hard economic times, and using these techniques, however unrealistic the assumptions sometimes have to be when using them, is what economists are now comfortable doing.

It would be good if economists and political scientists worked together on the feedback effects between economics and politics. Maybe some will, but the institutional separation between economics and political science departments seems to be a high barrier.

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