Red Alert

The Turning Point

Posted by on March 10th, 2010

There is a quiet revolution underway in macroeconomics. 

The old orthodoxy – the “Washington consensus” – is being deserted by leading economists in response to the Global Financial Crisis. 

For me the turning point was last month when the IMF published a challenging article by its Chief Economist Olivier Blanchard and others, that calls time out on the old orthodoxy. 

Although much debated because of its suggestion around a higher baseline inflation target, it is much broader in its critique of the failed status quo and directions for change.

If you have’t read it, see it here: http://blog-imfdirect.imf.org/2010/02/12/imf-draws-lessons-from-the-crisis-reviews-macro-policy-framework/

 For further comment see:

http://macroblog.typepad.com/macroblog/2010/02/do-we-need-to-rethink-macroeconomic-policy.html

http://economistsview.typepad.com/economistsview/2010/02/do-we-need-to-rethink-macroeconomic-policy.html

http://www.economist.com/blogs/freeexchange/2010/02/monetary_policy_2 

I will be writing more about the IMF change of direction, the breakdown of the consensus and what it might mean for us. 

We live in exciting times.  The current government is now clearly living in the past.


11 Responses to “The Turning Point”

  1. Tracey says:

    Thanks for the links David.

    I’ve also followed george soros (sp) newsletter for a number of years… funny how some people can quickly see and pick trends, and stay ahead of them

  2. Simon Arnold says:

    I thought the Economist leader on 18 Feb had this about right:

    “EVEN in economics, the guardians of orthodoxy are not given to capricious changes of mind. So when economists at the IMF question received wisdom and the fund’s established views twice in a week, it is no small matter. Two new papers have done exactly that. The first reversal, on inflation targets, makes less sense than the second, on capital controls.”

    It then precedes to arguments against any change in the inflation targets. Worth a read before thinking there is a silver bullet lurking here.

  3. David Cunliffe says:

    Simon, thanks for that. I have mixed views about the inflation target – as does Blanchard himself: more monetary stimulus headroom, more risk of embedding higher inflationary exectations.

    My hope though is that people will read past that headline to appreciate his broader deveastating critique of the former orthodoxy; and the range of suggestions he raises for reform. As he said, at this stage these are questions not answers.

    Point is, Labour is asking the same questions here – the government is not.

  4. burt says:

    This change in the orthodoxy could be National’s ‘third way’. I wonder if National will be all talk and then denigrate some of the key planks of the ‘new way’ to satiate their core constituents two terms later. Ho hum, two party system plays the ying and yang of economic thinking.

  5. rainman says:

    Listening to the various podcasted public lectures at the LSE over the past few months would yield the same insight. Capitalism is certainly due for a bit of a change.

  6. The Blanchard paper has had extraordinary currency. Its power is drawn in opart from the citicism of the Consensus derived from the crisis, The roots of the critique are also longer and deeper. Some are in the responses to the Asian crisis of the late 1990s, when Malaysia and others thumbed their noses as the orthodoxy and bounced back rapidly. Some lie in internal shifts within the World Bank and IMF as both began to recognise over the last 20 years that the orthodoxy was far too narrow a prescription. Important have been intellectual currents outside the orthodoxy (Krugman, Stiglitz and others, stressing institutional factors and a “political economy” approach. China’s rise to second biggest global economy, and its healthy disrespect for much of the orthodoxy, is a factor, too. I could go on, but the point is that the Consensus has been eroding for some time.

    The interesting thing is that the teaching of economics is traling badly these changes, and most graduates continue to be produced grounded in the neo-classical verities of the Consensus. Moreover, inertia makes a shift in Treasury thinking to match the Orthodoxy’s decline difficult to achieve. And the boy economists who populate our sound bites remain ebullinatly neo-classical, for that is what they were taught and parrot. These are all lags, much beloved by economists, but they make policy change a challenge as wholesale institutional shifts are needed. Hence, I applaud the idea that Labour begins an intellectal debate about the decline of the Orthodoxy, signalling clearly that policy thinking needs to adjust. The Fabian Society, about to begin a series of meetings on economic futures can help out here.

  7. Tracey says:

    ““Perhaps the important thing to take away from this discussion is that to central bankers, inflation is a bogeyman. But to good economists, inflation is merely a variable, an economic indicator over which governments have some control and which they can manipulate to good or ill effect. “”

    Inflation has, for too long, been seen as a panacea, almost zealot-like. Anyone who questions it as a basis point is scorned. We have successive Governments looking at job creation, and reducing numbers on benefits, none more so than the current Govt. All the while tagging our economy to a marker which prevents 100% employment.

    These are issues long overdue a debate.

  8. SPC says:

    Perhaps the financial sector is under-taxed and under-regulated – Hard Talk BBC.

  9. Richard McGrath says:

    The “orthodoxy” these days seems to be Keynesianism – printing fiat money, inflating the currency, deficit spending, boom and bust cycles of credit with more state intervention to delay the inevitable correction, all of which our children and their children will be paying for.