Understanding Fiscal Policy Change at the International Monetary Fund Since the Great Recession (Figures)

In total, the paper examined the biographies and the work of 144 economists who authored studies cited in WEOs and GFMs. Of these, 84 (58 percent) supported some kind of doctrinal change and 60 (41) defended stability. In the “change” group, 11 were based outside the Fund and 8 were visiting scholars. In the doctrinal “stability” group only one was a visiting scholar and 5 were based outside the Fund. Several detailed findings emerge. First, figure 1 shows that most of the participants in the fiscal policy debate were from the RED and FAD, followed by the European Department. The percentage of economists doing mixed research was significantly higher than that of orthodox researchers in both RED and FAD. When the mixed group is disaggregated, it becomes clear that the resistance of the orthodox was a lot stronger in FAD and that RED was truly the professional ecology where the boldest advocates of change (the revisionist) dominated. FIGURE 1: Group distribution by department (out of N=144)   18.00   %  of  Total   16.00   14.00   12.00   10.00   8.00   6.00   4.00   2.00   0.00   Change   Stability   Second, the top of the bureaucratic pyramid as well as its base came heavily on the side of change. As Figure 2 shows, department directors supported change and economists in entry-level positions and visiting fellows were overwhelmingly in the group with “pure” revisionist papers. It was only among assistant directors and senior economists that the percentage of orthodox (co)authors was as high as that of economists willing to stick to a strict orthodox line.   FIGURE 2: Group distribution by position (out of N=144) %    of  Total   Staff  Positions   18.00   16.00   14.00   12.00   10.00   8.00   6.00   4.00   Change   Stability   2.00   0.00   Third, while senior management did not use promotion as a tool to remake the playing field to favor the forces of change, they nevertheless did not hesitate to use their power to shape the hiring of “young Turks” ready to do research that contributed to doctrinal change. Below follows a systematic analysis of the CVs of the IMF staff from the revisionist, orthodox, and mixed groups through a look at whether they were promoted, newly hired, or experienced no change in their career in the 2007-2013 period. An IMF economist was considered promoted if (s)he moved higher on the pay scale15 or from a regional department to departments with higher status like FAD or RED. The label “new hire” was applied to all economists who joined the Fund after 2007. The results (Figure 3) show a pattern in line with the hypothesis. While the number of economists who were promoted was equal between the pro-change and pro-stability camps, the new hires joined the former in much greater numbers than the latter. 15 The IMF’s staff hierarchy can be found at www.imf.org/external/.../webtable54.pdf   FIGURE 3: Group distribution by career dynamics (2007-2013)   In closing this part of the analysis, the chapter carries out a merger between content and network analysis in order to visualizes the institutions that supplied the Fund with proponents for fiscal policy change or stability. The analysis processes 144 biographies of economists based in or contracted by the Fund to write on the austerity-stimulus debate between 2007 and 2013. The results show that the proponents for changing the IMF’s fiscal policy orthodoxy in a more “Keynesian” direction came largely from inside the Fund and specifically from the Research Department, with a few European and NorthAmerican central bank economists as well as MIT academics in supporting roles. A large part of the Fund’s most influential department (Fiscal Affairs) was divided and its proausterity supporters in academia came from Harvard and Bocconi University. The European Commission supplied the IMF with a community of experts who were split between stability and change. FIGURE 4: Proponents of stability and change inside and outside the IMF As for the academic background of the authors, the network analysis below presents a few findings that challenge the findings of much of the existing literature on the IMF that the IMF staff who do policy relevant work got their Phd degrees at elite US institutions. Clearly, the evidence suggests that the academic profile of both pro-change and prostability camps is a lot more diverse. MIT and Stanford are in the inner circle of the prochange camp, but so are Amsterdam, IIPS Paris and Surrey. Researchers trained in continental European economics departments dominate the pro-change camp and educational promiscuity reigns in the pro-stability camp as well. Certainly when it comes to the fiscal policy debate, the Fund’s internal epistemic struggles were not a sideshow to some Ivy League rivalries. In fact, staff with degrees from the usual suspects (LSE, Harvard, Princeton, Columbia) supplied both advocates for change and for stability. FIGURE 5: PhD granting institutions of the authors of IMF research on fiscal policy Framing with macroeconomic models In the broader context of mainstream macroeconomics, IMF economists pride themselves of being good citizens. Virtually all the revisionist research was expressed using widely accepted macroeconomic models and by focusing on the methodological tools that calculate the value of fiscal multipliers. In October 2008, before Blanchard could establish himself properly as RED director, the Fund’s WEO publicly stated that the fiscal multiplier of expansions was negative, a restatement of the New Classical argument about the self-defeating effects of fiscal expansions. But only two months later some of the Fund’s top researchers and officials declared that the output shock was so unusual, that monetary policy was so powerless, and that deleveraging was so abrupt that fiscal multipliers were likely to be much higher (Spilimbergo et al 2008). In 2009 Fund research concluded that multipliers were greater than one in developed countries and less than one (yet positive) in middle-income and low-income countries (Spilimbergo, Symansky, Blanchard, and Cottarelli 2009). The 2009 WEO and GFMs quickly integrated such insights.   Nevertheless, it was not until 2010 that IMF staff began to churn out studies cited in GFMs and WEOs that showed high positive multipliers. The implication was that fiscal policy is genuinely expansionary and that mild and backloaded austerity packages would have fewer contractionary effects than sharp and frontloaded ones (IMF 2010; Ball et al 2011; Guajardo et al 2011; Baum et al 2012; Erceg and Linde 2012; Batini and Melina 2012; Blanchard and Leigh 2013).   Methodological innovations in academia and the Fund facilitated this overwhelming support for high multipliers. Within academia, the struggle between fiscal pessimists and optimists took place on the same methodological terrain: structural vector autoregressions (SVARs) and dynamic stochastic general equilibrium (DGSE).16 Moreover, while studies done early in the crisis used models that did not allow multipliers to vary between expansion and recession, and failed to capture the lack of monetary policy space when interest rates are close to 0, subsequent recalibrations carried out after 2009 fixed the problem (for an overview see Auerbach and Gorodnichenko 2012). Within months, a team of IMF economists built on these methodological improvements and found consistently positive multipliers in recessions (Batini et al 2012). Finally, the importance of the methodological innovations became crystallized when some IMF economists who found high multipliers stressed that their results were broadly consistent with the entire theoretical spectrum, from (old) Keynesianism to the neoclassical purism of (new) modern business cycle models (Leeper et al 2010; Batini et al 2012).   16 For a detailed explanation of these models see Auerbach (2012). Interestingly, Olivier Blanchard had used SVAR in his foundational 2001 study on multipliers.   Conclusions The “interregnum pregnant with development opportunities” the Global Financial Crisis and the ensuing Great Recession brought along has not led to a “Berlin Wall” moment for the IMF’s doctrine on fiscal policy. Instead, the Fund made adaptive changes to its precrisis policy status quo that enabled the organization to weather the drama. Unsurprisingly, an older emphasis on maintaining states’ credibility with financial markets remained the primary goal of policy. However, this goal now had to cohabit with greater acceptance of discretionary fiscal stimulus programs and an emphasis on gradual fiscal consolidation where fiscal space for stimulus was limited. Also, unlike the pre2008 period, the IMF now advocates more balance between revenue and spending measures in the approach to fiscal consolidation.   To explain this revision of official fiscal policy doctrine, the paper focuses on the intellectual dynamics of academic macroeconomics, staff politics, external support, and framing tactics. Given the relatively tight epistemic interconnectedness between IMF researchers and mainstream academic economists, the long-run debate over the value of fiscal multipliers was eventually internalized in the World Economic Outlook, the Global Fiscal Monitor, and in the IMF studies these departmental reports referenced. The evidence suggests that critical to internalization of the more “Keynesian” arguments has been change at the managing and department director levels. Also critical has been the recent hiring of many new economists whose research suggested doctrinal change. To strengthen their ideational offensive, the advocates of change formed external epistemic networks with academics, central bankers, government technocracies, and economists located in private finance and think-tanks. To reduce the professional costs of their epistemic struggle, these ideational entrepreneurs wrapped their work in the methodologically inoffensive cocoon of generally accepted macroeconomic models. In terms of its academic background, this debate was shaped not by a few elite US economic departments, but by a more heterogenous set of PhD profiles, with non-elite and continental European universities playing a much more important role than conventional wisdom assigns to them.   Some may read the Fund’s fiscal revisionism as an opportunistic, experimental, and perhaps reversible intellectual contradiction meant to reprogram the instruments and settings of neoliberalism for the political and economic characteristics of the Great Recession and its aftermath. But on the other hand, one should not dismiss a priori the possibility that the adaptive incremental change noted in this paper will morph into a transformative one, or, more ambitiously, into a paradigm shift. This paper suggests that doctrinal change may be difficult but not altogether improbable if all enabling conditions are present. To achieve more systemic forms of doctrinal change than the one analyzed here, future research could perhaps begin by comparing the story of the Great Recession told here with the Fund’s deeper doctrinal change after the Long Recession of the 1970s.