Session at Bretton Woods Conference
Saturday, April 9, 2011
Getting Back on Track: Macroeconomic Management After A Financial Crisis
Paul Jenkins, Distinguished Fellow at the Centre for International Governance Innovation, introduced the panelists and moderated the ensuing discussion.
Duncan Foley - Leo Model Professor for Economics at the New School for Social Research
Duncan Foley showed how GDP has been a poor predictor of employment in recent recessions. On the other hand, a subset of GDP that excludes poorly measured services, including financial services, tracks employment very well. Current accounting practice is to include financial sector wages and profits on the income side of GDP accounts, and to impute a fictitious product, financial services, to balance the product side. This accounting practice may explain the recent GDP-employment disconnect. From a classical political economy perspective, financial incomes are transfers of wages and surplus value generated in production.
Richard Koo - Chief Economist, Nomura Research Institute
Richard Koo described how a “balance sheet recession” has plagued Japan for two decades. After building up excessive debt, Japanese businesses became so obsessed with reducing debt that they failed to invest at normal levels. That necessitated Japanese government deficits to maintain employment. Now, with their balance sheets in better shape than anywhere else in the world, Japanese corporations remain obsessed with avoiding debt and are investing too little.
Mario Seccareccia - Professor of Economics, University of Ottawa
Mario Seccareccia described a “new consensus” on macro policy that responsibility should lie with monetary policy except when rates hit the zero lower bound. Then some fiscal stimulus makes sense until private sector demand revives. As automatic stabilizers have been scaled back, there’s more need for discretionary response. He recommended that more attention be given to Keynes’ proposal for a national investment bank.
Alan Taylor - Professor of Economics, University of California and Morgan Stanley
Alan Taylor suggested that the recent financial shock may have been the largest ever, but that the policy response was much better. He noted that credit booms end in crisis. He also presented a chart on financial crises since 1870 that indicated unusually few crises in the 1950s and 1960s, an era of fixed exchange rates and tight financial regulation. He found that private capital is moving in the expected direction from developed markets to emerging markets, but that this was more than offset by government capital going the other direction. That may change as EM’s find that they have enough reserves and they need currency appreciation to avoid rising inflation.
Carmen Reinhart - Dennis Weatherstone Senior Fellow, Peterson Institute for International Economics
Carmen Reinhart argued that the underlying cause of the current crisis was surging debt and that there is no such thing as pretty deleveraging. Rather than focus so much on short term interest rates as the policy tool, we should reconsider old tools like reserve requirements and capital controls. She disagreed with Koo about the benefits of chronic budget deficits. She agreed with Taylor that tight financial regulation in the 1950s and 1960s led to far fewer crises.
John Smithin - Professor of Economics, York University
John Smithin explained that Keynes told Hayek that he agreed “morally and philosophically” with Hayek’s Road to Serfdom, but argued that the critical issue is where to draw the line between what government should and should not do.
Q&A and discussion was moderated by Paul Jenkins