Macroeconomic Policy: The Elephant in the Room

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Triple Crisis Blog

Macroeconomic Policy: The Elephant in the Room

Alejandro Nadal

International conferences on poverty and the environment come and go. There's always a big pachyderm in the meeting room. It's got the words "macroeconomic policy" written on its forehead. Nobody wants to talk about it.

Consider the following. The Millennium Development Goals were debated in many conferences, but nobody spoke about the macroeconomic policy framework needed to achieve them. As if reducing hunger and extreme poverty, generating employment and providing health services and education had nothing to do with fiscal policy, monetary policy and financial deregulation. Aside from some pious words about financing and overseas development assistance, the implicit message was to carry on with the same macroeconomic policies. That could only have been based on faith in the trickle-down potential of neo-liberal globalization.

At UNFCCC-COP events, everyone recognized there are serious issues in terms of financial resources for mitigation and adaptation. Vulnerability and poverty go hand in hand, it is said. But, again, nobody wanted to discuss the relationship between neo-liberal macroeconomic policies and poverty, as if they had no connection. Even the Stern report kept safely away from the thorny issues of macroeconomic policies in developing countries.

Then came the Bad Times. The 2008 crisis led the UN Environment Program (UNEP) to launch its Green Economy Initiative and the Global Green New Deal (GGND). Their objective is to revive the global economy, "boost employment and accelerate the fight against climate change, environmental degradation and poverty." According to the GGND, the triple crises demand the same kind of initiative as shown by Roosevelt's New Deal of the 1930s, but "at the global scale and embracing a wider vision." The punch line is that "re-booting the world economic system" is simply not enough to get us on the road to sustainability.

One would think that macroeconomic policy would be a relevant issue in this context, especially after the reference to FDR's "New Deal." Well, the authors appear to think differently: the Global Green New Deal is unconcerned with macroeconomic policies.

What? Monetary and fiscal policies, financial regulation, exchange and interest rates, capital flows, and incomes' policies, they have nothing to do with environmental and social sustainability?

Let's assume we keep a monetary policy obsessed with price stabilization, a fiscal policy focused on generating a primary surplus for "responsible debt management", an open capital account and financial deregulation. On top of this, let's say we also maintain downward trends for real wages. Clearly, more efficient automobiles and intelligent buildings will not, by themselves, give us at the end of the day a "green global economy."

Why is macroeconomic policy ignored in so many important conferences? Is it because macroeconomics focuses on the short term and is unconcerned with long term developmental and sustainability issues? This is a real problem, but I think there might be a deeper reason.

Perhaps another explanation is the state in which macroeconomic theory finds itself today. For one thing, many people find it difficult to get around in this messy land where everything is, as Blanchard and Fischer once remarked, in a state of flux. What with getting to know who are the New Keynesians and how they differ from the Keynesians, the Neo-Keynesians and the Post-Keynesians, it can get a bit confusing.

I've heard people in progressive circles talk about the interest rate as if the loanable funds of the old Classical school were not only correct, but in fact the only theoretical reference. Similarly, the response to Herman Daly's call for an environmental macroeconomics came in a series of articles using the venerable IS-LM model (including Daly's contributions), without realizing that the model's flaws made it useless, both from a policy and a theoretical perspective. Yes, many think that the IS-LM framework is still alive in central banks. Perhaps, but there are a lot of silly models in central banks and that's not sufficient reason for us to rely on them. Obviously we need to be more careful on how we think about macroeconomics.

Maybe there is an additional explanation for why the elephant in the room is met with silence. Discussing macroeconomic policies raises awareness about the inner workings of the neo-liberal model and its political economy. Suddenly, the relation between cuts in social expenditures and a primary surplus becomes crystal clear. The rapport between controlling inflation and holding back aggregate demand (all too frequently through repressing real wages) turns out to be self-evident. Pretty soon people are talking about how macroeconomic policy is subordinated to the priorities of financial capital. This morphs the discussion into a political debate, something the establishment dislikes.

Progressive movements need to seize the initiative in defining new avenues for macroeconomic policy. They have done this in debates on agricultural policies, as well as with social and environmental policies. But we still have a long way to go to replace that elephant with a friendly creature.

Alejandro Nadal is a professor at El Colegio de México, where he directs the research Program on Science, Technology and Development

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