Ever since the financial crisis struck, we’ve suffered grievously from the tyranny of respectable opinion. As I’ve often argued, the problem with our inadequate and often perverse response to mass unemployment isn’t that we lack a workable economic framework; basic IS-LMish macroeconomics has, in fact, provided quite good guidance.The problem, instead, has been that following economic logic has been deemed unserious. Serious people want balanced budgets and price stability, never mind what the textbooks say. This has among other things led to the peculiar result that respectable people grab on to academic papers that present dubious nonstandard results — expansionary austerity! A debt cliff at 90 percent! — while radicals like me are the ones citing Econ 101.
In all of this, the IMF has played a somewhat strange role. It is, institutionally, the very model of respectability; historically, its main role has arguably been to impose austerity of one kind or another. Yet it has a sophisticated, fairly Keynesian research department — and management that actually listens to that department (as opposed to, say, the European Commission, whose attitude seems to be,”If I want your opinion I’ll tell you what it is.”) You might imagine that the IMF would therefore take the lead in challenging respectable opinion when it’s dead wrong. But it obviously feels constrained; its rebellions against respectability have to be discreet.
And the result is a proliferation of euphemisms.
There’s a fine example in the latest World Economic Outlook, which makes a strong case that “normal” real interest rates have fallen substantially over time, and not just because of the financial crisis:
What does this imply for policy? Here we go:
With respect to monetary policy, a period of continued low real interest rates could mean that the neutral policy rate will be lower than it was in the 1990s or the early 2000s. It could also increase the probability that the nominal interest rate will hit the zero lower bound in the event of adverse shocks to demand with inflation targets of about 2 percent. This, in turn, could have implications for the appropriate monetary policy framework.
What does that actually say? Well, my subtitled version says this: Raise the inflation target to 4 percent, dummies. But the IMF wouldn’t,and presumably can’t, say that outright. And I suspect that the people who need to hear that won’t at all get what the Fund is really saying.
Secular stagnation, here we come.