Ángel Ubide: The new economic policy | Business

Paraphrasing the Danish philosopher Soren Kierkegaard, history is lived forward, but it is only understood backwards. The vital dialectical process of action-reaction implies that the final result, the one that we later describe and explain with an overwhelming rationality and internal logic, rarely coincides with the initial intentions. The final result is the cumulative effect of many decisions, some planned, others improvised, and many the result of chance and serendipity. To understand the new economic policy, focused on investment and not savings, much more micro than macro, with actions that limit, instead of promoting, the invisible hand of the market, we must look back.

When I joined the IMF in the late 1990s, the paradigm was clear: economic policy was to liberalize the economy, stabilize inflation, and reduce deficits. One of my first bosses left a lapidary sentence one day in a meeting: in his long career as an IMF economist, he had never recommended a less austere fiscal policy than the one proposed by the government. Economies could always be more flexible and open, the public sector smaller, the deficit smaller. You could always be more virtuous to promote growth.

This consensus was understood looking back. The very long shock wave of the energy crisis, the management of the fall of the iron curtain, the difficulties of European integration, the endless crises in emerging countries, were problems that could be solved with an ever closer approximation to the neo-Keynesian economic model. (not neoliberal, a concept whose abuse has stripped meaning) of representative agents. Price stability, fiscal discipline, and deregulation and liberalization as avenues for maximizing potential growth.

So far, all good. The end of history that Fukuyama preached—the dominance of liberal democracy—coincided with the end of economic history—the dominance of the neo-Keynesian model. But, little by little, the limits began to be glimpsed. The fiasco of the privatizations of the former Soviet Union raised the first alarms. The IMF debated the incorporation into its mandate of the liberalization of the capital balance, as a logical extension of the liberalization of the trade balance, but it did not come to fruition. Is it possible that too much could be liberalized? The emerging countries, chastened after their multiple crises in the 1990s, began to take action on the matter, actively managing their exchange rates and accumulating reserves as a self-defense mechanism, ignoring the new protection instruments offered by the IMF. Looking back, that’s where the process of rebalancing efficiency and resilience began.

The financial crisis of 2007-08 marked a turning point: if, perhaps it had gone too far, financial regulation had relied too much on the virtues of the invisible hand for risk management, it was necessary to intervene more and better. The financial regulatory reform significantly increased the capital and liquidity requirements of the banking sector and restricted its speculative activities. The next step was the debate, initially timid and almost secretly, on the goodness of capital controls. Hidden behind the euphemism “capital flow management”, little by little the IMF admitted, and later even encouraged, capital controls as an instrument of economic policy. Who has seen and who sees you.

After the crisis, deflation had become the enemy to beat, and monetary policy, once boring and minimalist, had become an alphabet soup of asset purchase programs and liquidity provision that acted on a wide spectrum of interests. financial assets. The Greek debt restructuring scare maintained fiscal discipline as the last bastion of the neo-Keynesian paradigm, but the persistence of deflationary risk and rising inequality opened the door to a more active use of fiscal policy. The icing on the cake was added by the IMF, suggesting that reducing inequality should not only be an end in itself, but could help improve potential growth. Plain growth was no longer enough, we had to go for inclusive growth. The emphasis on savings was giving way to investment, the protective state was expanding, the paradigm was evolving.

But the US, during the Trump administration, went further and broke a taboo: the active use of tariffs and trade policy for purposes unrelated to international trade. The trade war with China went far beyond correcting trade distortions, and implicitly marked a return to protectionism and the beginning of the end of the multilateral management system for international trade. The Biden administration has not only maintained the tariffs, but has worryingly abounded in the use of trade policy for strategic objectives. The concept of friendshoring —establishing commercial relations only with allied countries— implies an economic re-regionalization with winners and losers.

The covid crisis —the management of which was dominated by an active fiscal policy— and the Russian invasion of Ukraine —which inserted energy independence and national security into economic policy— gave the final push to the transformation of economic policy. This now contemplates a wide panoply of actions —subsidies, sanctions, price limits, specific taxes, tariffs, restrictions— together with an activist industrial policy, what Janet Yellen, the American secretary of the Treasury, has called the “new supply policy”. ”. Economic policy is subservient to national security objectives, as shown by the recent programs of investment restrictions, subsidies, and sanctions in the semiconductor sector.

The economic policy of the 1990s was macroeconomic policy, focused on growth. The economic policy of the 21st century is microeconomic policy, focused on resilience. On the one hand, it is the logical evolution: as dictated by the Tinbergen rule, when there are multiple objectives—growth, inequality, climate change, energy independence, national security—multiple instruments are needed. On the other hand, it creates a context of uncertainty: actions are accumulated, some improvised, without having a global vision and, therefore, understanding the joint effect of all the measures. We lack a theory on the efficiency and cost of using economic measures as a geostrategic instrument. Is the normalization of the use of tariffs, subsidies, and sanctions desirable? What are the long-term and side effects, and what is the mechanism to dismantle them? Is the use of economic sanctions for geostrategic reasons more efficient than the reinforcement of military instruments? In Europe, should these measures be designed and financed at the national level or, preferably, at the European level? And, above all, what is the net impact on the growth and well-being of citizens?

We are creating the new economic policy day by day, but it will take time to understand it backwards.

On Twitter: @angelubide

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