The writer is a former central banker and professor at the University of Chicago
President Donald Trump recently met the Federal Reserve chairman Jay Powell and tried to persuade him to lower interest rates, reminiscent of the political pressure US presidents who were applicable to the FED in the 1970s.
Some investors can worry that US economic institutions are eroded, which could lead to macro -economic volatility. Yet those fears are likely to be claimed by the FED that holds on the rates.
However, there is still reason to worry – not about weakening American institutions, but about the changing political environment in which they operate.
To understand the role of institutions in the economic folklore, we must go back to the nineties, when it was easy to distinguish the economic policy of the emerging market from that of industrialized countries.
The first were ‘Procyclic’ – countries that were spent freely when the times were good, which contributed to debts and inflation, only to be pulled back to reality when the times were bad and their ability to borrow dried up. Developed countries, on the other hand, have adopted stabilizing policy; The US ran large tax surpluses in the rapidly growing in the late 1990s.
Economists argued that institutions explained the difference. Independent central banks in industrialized countries were aimed at inflation, while their parliaments followed tax rules that limited excessive expenses, and even required budgets to balance the cycle. Institutions were a forced tube that kept political opportunity under control.
In this explanation, cracks emerged quickly. In the nineties, multilateral organizations such as the IMF for emerging markets to adopt such institutions. But even when reformers heard the advice in Acht, the policy remained procyclic, culminating in a series of crises on the emerging market.
But from the beginning of the 2000s, the macro -economic policy in some EMS became more stable, because institutions started to get more policy straction. The government of Fernando Henrique Cardoso initiated inflation in Brazil, but the central bank really only became credible when his left -wing successor, Luiz Inácio Lula da Silva, maintained the independence of the bank.
The institutions did not change, but the political consensus behind them did it. Growth, partly driven by the raw materials tree, offered budgetary surplus surpluses to help the emergency. Programs such as Bolsa FamÃlia made direct transfers to the poor, while others improved access to education, health care and housing.
Precarity fell. The incentive for Lula’s employee party to enjoy political radicalism decreased, which made a broad national consensus on macro-stable policy possible. Institutions started to work. While prolonged periods of weak growth are exerting the consensus pressure, it is still delivered in many EMS. The error in the insistence of institutions on EMS in the 1990s was that there was no political consensus yet.
Developed countries, on the other hand, have become demonstrably procyclic. The US spent enormously, even when the recovery of the pandemic was well in the corridor, which contributed to the inflation that the FED is still trying to control.
Trump’s “Big Beautiful Bill” threatens to expand the already untenable American tax deficit. France and Japan also have trouble limiting the debt-BDP ratios of more than 100 percent-to-be-bike in the nineties.
It is unlikely that the Fed is institutionally weaker. It was quick to confirm his independence Shortly after the Trump-Powell meeting. Indeed, regardless of those who replace Powell next year, it is unlikely that Fed’s policy will be flexible. Moreover, it is not unbelievable that the Trump administration would welcome a scapegoat in case the economy goes south.
However, the political consensus in the US has changed. The Fed today probably does not have the political room to tackle inflation as powerfully as in the era of Paul Volcker. Likewise, tax rules in the US have not changed in the US. Has the political willingness to respect their mind.
That is because precarity and inequality have increased in developed economies. The disappearance of well -paid jobs in the middle class for the moderately competent due to technological change, and to a lesser extent trade, is the obvious cause.
The highly educated, on the other hand, has benefited because globalization has offered greater opportunities for people in the White-Collar industry. For those who are lagging behind, radical politicians offer the convincing message that the self -operated elite policy is responsible for their condition.
As a result, the political consensus behind the macro-stable policy is weakened, with Gop-Fiscal Haven leaving their opposition against expenditure.
Balanced budgets require compromises. But when politics is so polarized, few are willing to make them and the expenditure is the norm. For some industrialized countries, sudden stops can be on the horizon when markets are not prepared to finance their governments.
Institutions do not insure countries a ticket for macro -economic Nirvana – and they cannot create a political consensus. That requires citizens to believe that economic results are fair. This requires structural reforms that improve opportunities for those who fall behind.
Perhaps developed countries should start by approaching what emerging markets did.
