The halo of victory: What Americans learned from World War I
Hugh Rockoff 04 October 2014
World War I profoundly altered the structure of the US economy and its role in the world economy. However, this column argues that the US learnt the wrong lessons from the war, partly because a halo of victory surrounded wartime policies and personalities. The methods used for dealing with shortages during the war were simply inappropriate for dealing with the Great Depression, and American isolationism in the 1930s had devastating consequences for world peace.
World War I had important consequences for the structure of the US economy and its role in the world economy. This was especially true in the world of finance. The US transitioned from being a debtor nation to a creditor nation, and financial leadership moved from London to New York. But equally important were the lessons that Americans drew from the war. Although the war had much to teach, Americans tended, I will argue below, to learn too much from the war, drawing strong conclusions from a war in which the US was actively engaged for only 19 months.
Competition policy Economic history
World War I, WWI, planning, rationing, New Deal, Great Depression, fiscal policy, monetary policy, stimulus, financial crisis, conscription, inflation, unemployment, price controls, Competition policy, antitrust, National Industrial Recovery Act
Where danger lurks
Olivier Blanchard 03 October 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.
Until the 2008 global financial crisis, mainstream US macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment.
The benign view reflected both factors internal to economics and an external economic environment that for years seemed indeed increasingly benign.
Macroeconomic policy Monetary policy
macroeconomics, global crisis, great moderation, rational expectations, nonlinearities, fluctuations, business cycle, monetary policy, inflation, bank runs, deposit insurance, sudden stops, capital flows, liquidity, maturity mismatch, zero lower bound, liquidity trap, capital requirements, credit constraints, precautionary savings, housing boom, Credit crunch, unconventional monetary policy, fiscal policy, sovereign default, diabolical loop, deflation, debt deflation, financial regulation, regulatory arbitrage, DSGE models
Eurozone recovery: there are no shortcuts
Roberto Perotti 13 September 2014
There is a growing consensus that austerity is contributing to the Eurozone’s macroeconomic malaise, but also that spending cuts are needed in the long run to achieve fiscal sustainability. Some commentators have advocated a temporary tax cut financed by unsterilised ECB purchases of long-term public debt, accompanied by a commitment to future spending cuts. This column argues that such commitments are simply not credible – especially given the moral hazard problem created by central bank monetisation of debts.
The consensus is increasing that austerity has not worked – Europe stands on the edge of deflation and suffers from a deficit of demand. A recent VoxEU proposal (Giavazzi and Tabellini 2014) offers a solution that is widely shared on both sides of the Atlantic – all Eurozone countries should cut taxes simultaneously by 5% of GDP, and the ECB should buy the extra debt without sterilisation. This should be accompanied by a credible plan to reduce government spending in the future.
Macroeconomic policy Monetary policy
austerity, eurozone, monetary policy, helicopter money, quantitative easing, QE, stimulus, fiscal consolidation, fiscal policy, spending cuts, fiscal sustainability, debt monetisation
Did the Cash for Clunkers stimulus programme reduce new vehicle spending?
Mark Hoekstra, Steve Puller, Jeremy West 03 September 2014
‘Cash for Clunkers’ was billed as a stimulus programme that would boost sales to the ailing US auto industry in 2009. This column shows that the design of the programme actually caused it to reduce revenues to the industry it was designed to help. The authors estimate that the entire increase in sales during the programme would have happened anyway in the following eight months. Moreover, since more fuel-efficient cars tend to be less expensive, the fuel economy requirement of the programme incentivised households to buy cheaper cars.
Cash for Clunkers as stimulus
There has been significant debate about the role of various federal fiscal and monetary policies during recessions. Among the fiscal stimulus programmes, however, one seemed to hold particular promise. The Car Allowance Rebate System (CARS), better known as Cash for Clunkers, provided subsidies of up to $4,500 to households who scrapped their existing ‘clunker’ and purchased a new, fuel-efficient vehicle. Subsidies totalled nearly $3 billion.
Energy Environment Macroeconomic policy
Cash for clunkers, scrapping subsidies, stimulus, environment, fuel efficiency, fiscal policy, cars, Auto industry
How to jumpstart the Eurozone economy
Francesco Giavazzi, Guido Tabellini 21 August 2014
The stagnating Eurozone economy requires policy action. This column argues that EZ leaders should agree a coordinated 5% tax cut, extension of budget deficit targets by 3 or 4 years, and issuance of long-term public debt to be purchased by the ECB without sterilisation.
The mantra is that once again it is up to the ECB to save the Eurozone. Quantitative easing is the last policy tool available to jumpstart the Eurozone economy. The longer the ECB waits before starting to buy government bonds, the further away will the recovery be. This analysis, however, overestimates the power of monetary policy.
Europe's nations and regions Macroeconomic policy
ECB, monetary policy, fiscal policy, quantitative easing, public debt, aggregate demand, Eurozone economy, stagnation
Pension reform and equity
Benedict Clements, Csaba Feher, Sanjeev Gupta 17 July 2014
The discussion on pension reform typically centres on fiscal sustainability. This column argues that equity concerns are of primary importance, both in selling proposed reforms to the public, and as a first-order policy goal of the pension system. Focusing on the average pensioner is insufficient to evaluate policy.
Pension reform remains a critical fiscal policy challenge for advanced and emerging market economies. Despite reform efforts in these economies – which have focused on raising retirement ages and reducing benefits – spending is expected to rise as a share of GDP over the medium-term (EC 2012, Merola and Sutherland 2013). But pension reforms, to be politically acceptable, must also be perceived as fair. This column examines key equity challenges in the design of pension reforms, drawing on a new book published by the IMF (Clements, Eich, and Gupta 2014).
Poverty and income inequality
redistribution, fiscal policy
Revisiting the pain in Spain
Paul De Grauwe 07 July 2014
There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio
The different macroeconomic adjustment dynamics in Spain – a member of a monetary union – and the UK – a stand-alone country – is stark. Paul Krugman popularised this contrast in his New York Times blog with the title “The Pain in Spain” (Krugman 2009, 2011), and commented on my own analysis in De Grauwe (2011).
Europe's nations and regions Global crisis Macroeconomic policy
ECB, monetary policy, euro, EMU, Spain, monetary union, fiscal policy, UK, government debt, austerity, EZ crisis, Outright Monetary Transactions, currency depreciation
The social impact of fiscal policy responses to crises
Carlos A. Vegh , Guillermo Vuletin 12 June 2014
The question of whether fiscal policy should be pro- or countercyclical has become increasingly relevant during the recession. This column provides causal evidence from South American countries showing the success of countercyclical policy in improving social indicators of economic success, combined with correlative evidence from Europe. This represents a strike against the case for austerity-led growth.
Fiscal policy in many developing countries is typically procyclical. Expansionary in good times and contractionary in bad times, these policies often amplify business cycles. The most convincing explanations for such practices seem to be limited access to international credit markets during bad times and political pressures that tend to encourage too much public spending during boom periods (Calderon and Schmidt-Hebbel 2008). Whatever the reason, the pattern is well documented (see Frankel, Vegh, and Vuletin 2011 on the spending side and Vegh and Vuletin 2013a on the tax side).
fiscal policy, business cycle, austerity, cyclicality, LAC-7
Taxing, spending, and inequality – what is to be done?
Benedict Clements, David Coady, Ruud de Mooij, Sanjeev Gupta 15 April 2014
The causes and consequences of rising inequality have stirred a lively debate on appropriate policy responses. This column reviews how governments have successfully used fiscal policy to address distributive concerns. It also examines the policy alternatives that countries can pursue in order to reduce income and wealth inequality at a minimum cost to efficiency. Such policies include exploitation of property taxes, reductions in tax deductions that favour upper-income groups, investing in increasing the human capital of low-income groups, and reforming social benefits.
The causes and consequences of rising inequality have attracted considerable attention, including the recent study by Thomas Piketty (2014). This has also touched off a lively debate on the appropriate policy response to rising disparities in income and wealth (Mankiw 2013, Berg, Ostry, and Tsangarides 2014). But this is just one of the many challenges facing ministers of finance – reducing public debt ratios and raising growth are also priorities. So what’s a minister to do?
Poverty and income inequality Taxation
income inequality, redistribution, fiscal policy
Fiscal adjustment and growth: Beware of the credit constraints
Emanuele Baldacci, Sanjeev Gupta, Carlos Mulas-Granados 31 March 2014
The recent debate on the link between austerity and growth has focused on the short run. This column discusses recent research into the link between fiscal consolidation and medium-term growth under different financial conditions. If credit is not available to consumers and investors, private demand is less able to compensate for cutbacks in public demand, so large spending cuts can have a negative effect on growth. Difficult financial conditions probably explain why fiscal adjustments that worked in the 1990s have not produced similar beneficial effects on growth in recent years.
In the aftermath of the recent financial crisis, the discussion of the effects of fiscal adjustment on economic growth has intensified. While some scholars have focused on the characteristics of the fiscal consolidation needed to bring public debt down from historically high levels, others have examined the effects of alternative strategies on economic performance. The VoxEU debate aptly covered in “Has Austerity Gone Too Far?” (Corsetti 2012) sums up the conflicting positions.
Financial markets Macroeconomic policy
financial crisis, fiscal policy, deleveraging, fiscal consolidation, debt, credit constraints, austerity