Making policy is hard, but really important

We’ve talked a bit about the costs of unemployment recently and that discussion lead me to re-read Ken Rogoff’s letter to Joe Stiglitz from 2002. It’s clear in the letter than Rogoff is enraged with Stiglitz criticism of the IMF, but also with his arrogance and the potential consequences for vulnerable people. He’s right to be: the conduct of public policy has huge consequences for millions of people and we take on a heavy burden upon ourselves when we make policy recommendations. It should never be done lightly.

This confidence brims over in your new 282 page book. Indeed, I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem.

You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Joe, throughout your book, you condemn the IMF because everywhere it seems to be, countries are in trouble. Isn’t this a little like observing that where there are epidemics, one tends to find more doctors?

9 replies
  1. Luc Hansen
    Luc Hansen says:

    So Jamesz,

    Would you mind explaining what that “handbags at dawn” duel between two highly esteemed economists about the finances of developing countries has to do with today’s economic environment of crisis in advanced economies?


    • jamesz
      jamesz says:

      Of course, it doesn’t need to be relevant to the current crisis to be interesting, but in this case it is incredibly pertinent. The accusation of overconfidence is particularly interesting in light of the financial regulation being implemented around the developed world. Can central bankers really think that they will be able to pick anomalies and pinch them off before they cause any damage? We need to be realistic about how much can be avoided.

      It’s also about the need for a plan to restore fiscal balance in the medium-term. Austerity is a popular phrase at the moment and the big arguments are about whether there should be debt-financed government spending to lift aggregate demand. Rogoff is saying that, whatever the short-term plan, you need to ensure that the debt remains serviceable in the medium-term if you’re going to keep a lid on interest rates.

      • Luc Hansen
        Luc Hansen says:

        Wow! That was quick! Of course, it’s daytime where you are…:-)

        And Rogoff is correct.

        But, for example, the latest NZ 10yr govt bond yield is 3.18% Auckland needs a few billions invested in mass transit. Why wouldn’t we incur the debt to facilitate that at that interest rate?

        Evidently, Rogoff has now argued against Eurozone austerity in an FT opinion piece yesterday. Did you catch that?

        One more point, Google Public Data shows that almost all the advanced economies project reduced levels of govt debt in the foreseeable future. So, with households in debt pay down mode, where is GDP growth going to come from?

        • Matt Nolan
          Matt Nolan says:


          I’d be a little careful arguing from debt itself, it is more about having the path of interest rates at a level where they ensure that resources are being utilised.

          We wouldn’t argue that incredibly low long term bond rates are something the government should keep in mind when looking at when it times and figures out the scope of its set of potential investment opportunities. In a monetary policy sense, government borrowing will lift the “natural” interest rate – and so in countries with a ZLB issue, this is especially all well and good. In countries with very low long-term interest rates (eg everywhere) the argument for both government borrowing and easier short term MP is compelling.

          But of course, Stiglitz doesn’t want to think about underlying “constraints” – and the types of people supporting his statements in these directions often tend to struggle with the idea that government can’t create infinite output and that printing money for government purchases (outside of managing MP in line with an inflation target) is essentially a really inefficient tax. Rogoff’s email captures this sense of frustration IMO.

          Also for a microeconomist Stiglitz has a very strange interest in using blunt public policy to achieve economic ends without thinking about the impact of distribution – paying lipservice to “inequality” and then supporting regressive taxation through your monetary policy is a strange set of beliefs … and is also inconsistent with how he writes when it is for a more academic audience. I think his fundamental ideas are probably consistent (and closer to the mainstream), but when he translates them for the public he inadvertently slips in misleading statements.

        • jamesz
          jamesz says:

          Each project needs to pass a CBA, whatever the rate of interest. Interest rates don’t stay constant over time so we shouldnt’ think of this as a good time for a lolly scramble!

          Rogoff basically said the same thing in the FT piece you’re referring to: “given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects.”

          • Matt Nolan
            Matt Nolan says:

            Although you could argue that with long-term bond rates very low, the required rate of return now is lower than it has been in the past – of course this needs to be treated symmetrically, with a higher expected rate of return in situations where long-term rates are high (which govts don’t do)

            And the key point, as you say, is that the project actually has to make a social rate of return that accounts for risk, dead-weight loss (where tax income is used to pay for social elements that we borrow to fund – so everything outside of revenue generation for government), and the cost of the project. Throwing around multipliers outside of a view of the monetary policy reaction function, automatic stabilisers, and the ability to move around the timing of infrastructure projects is still largely folly.

              • Matt Nolan
                Matt Nolan says:

                Yes, but we know governments don’t change their discount factors – even though long-rates move considerably under times of duress. I believe that is part of Luc’s point.

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