Maurice Obstfeld discusses his tenure as the IMF’s chief economist
Retiring as chief economist of the International Monetary Fund at the end
of 2018, Maurice Obstfeld shares his thoughts on trade tensions, widening
inequality, the importance of education, and relations between United
States and China in an interview with F&D’s Gita Bhatt.
Obstfeld plans to return to the University of California, Berkeley, where
he was a prominent academic economist for 24 years and cowrote two leading
textbooks on international economics. His successor at the IMF will be
Harvard University’s Gita Gopinath.
F&D: What worries you most on the macroeconomic front?
MO: The worries are clearly set out in the World Economic Outlook:
trade tensions and adjustment to differential financial conditions in an
environment of much higher private and public debt than we had in the past.
Longer term, wage and productivity growth is an issue. How do we spur
innovation?
We need a big rethink on educational investments everywhere. Human capital
investments very early in life have been shown to be critical to future
success. But even later in life, they can promote greater flexibility of
workers, prolong working lives, and offset effects of aging populations.
That will also help mitigate some of the adjustment issues that might be
related to technology and trade. It will make economies more resilient and
better able to deal with the critical, long-term problem that we just
haven’t seen working people share in the gains from growth. There is now a
sense in a lot of countries that incomes of working people have stagnated,
that social mobility is lower, that opportunity is lower, that one’s
children will not be better off and may indeed be worse off. These trends
poison our politics.
F&D: The United States and China are world’s largest, most dynamic
economies. How do you see the economic relations between the two
playing out?
MO: Their disagreements go way beyond economics. They go fundamentally to
the issue of global leadership. If you are a country like the United
States, which has been a global leader and has shaped the global governance
structure, how do you manage this relationship, which at once offers
opportunities for cooperation but also hazards of conflict?
Moreover, how do you do it dealing with a system that is very, very
different from yours politically? If you look at the approach the Obama
administration took to the trade relationship with China, one important
element was the TPP [Trans-Pacific Partnership agreement], which excluded
China but which included the flexibility for countries (including China) to
join if they subscribed to the rules. This was a strategy for maintaining
US influence and potentially influencing through soft power the way China
conducted trade.
Now the relationship seems to have become more confrontational, certainly
in trade. I'm not sure confrontation is ultimately going to be productive
because it puts front and center the idea that one country has to "win" and
be dominant, as opposed to creating a structure within which countries can
coexist and conflicts are contained.
F&D: In your three years as the IMF's chief economist, what were
some of the more surprising global economic developments?
MO: When I came in, China had recently devalued the yuan and changed its
exchange rate regime, and asset markets were in turmoil. It set off a
period of worry about China's growth and stability, which affected global
asset markets through the first half of 2016.
The next surprise was the Brexit vote, which came in the middle of 2016 at
a time when we thought markets were still a bit shaky and we were worried
about possible downsides.
Very soon thereafter, we had the US presidential election, the outcome of
which was also a surprise and set up a new dynamic, where on one side there
was the prospect of more US fiscal stimulus supported by a booming stock
market. But, on the downside, there was a lot of noise about trade and
possible renegotiation of fundamental trade relationships, which after a
bit more than a year turned into action.
This was all happening against the backdrop of the Federal Reserve
gradually normalizing monetary policy. In December 2015 the Fed started
raising US interest rates, and as it has kept at it, we have gotten into a
period of much tighter financial conditions for emerging markets.
F&D: Do you feel the responsibility of your research’s impact on
policy?
MO: You always want your research to be as solid and as credible as
possible. If that’s the case, then I don't worry about it. One worries more
about giving the right advice in a crisis situation, where you might make a
severe mistake and a lot of people might suffer as a result.
I first understood this responsibility in August 2015, just before I
assumed this role. China devalued its currency that month, and global
markets were melting down. Some distinguished economists were putting out
alarmed—and alarming—tweets. The chair of the US Council of Economic
Advisers, Jason Furman, was on paternity leave, and as a member of the
Council, I was therefore the macroeconomist in charge. President Obama
called me in to the Oval Office along with the secretary of the treasury,
Jack Lew.
The president seemed calm about all of this. He looked at me and asked,
"Should I be worried?" I said to myself, "I have never been in this
position before, but I will probably be in this position a lot at the
Fund." I had a couple of seconds to consider my answer. And I said, "No.
The markets will find their footing, and for now I don't think the world is
coming to an end."
The president next looked at Secretary Lew. "Jack, what do you think?" He
replied, "I agree."
"OK, thanks," the president said. "Can we ask these folks to stop
tweeting?" End of meeting.
F&D: We have seen a backlash against globalization and an erosion
of trust in experts and institutions. What can we do to regain the
trust of institutions?
MO: This comes back to the issue of inclusion. Clearly there are large
segments of populations that feel that the sort of economic and political
consensus that we thought we had reached by the early 2000s has not worked
for them. They feel alienated from the elite power centers.
There is a failure of communication. There must be more of an attempt to
communicate, which becomes harder as even the media become more fragmented.
I do think, though, policies have to change if trust is to be regained.
Specifically, it is going to be easiest to affect labor market outcomes for
younger people, and that’s where a lot of effort and investment should go.
F&D: As chief economist, what happens if the new ideas you generate
conflict with IMF institutional positions?
MO: Well, our position has to change. And it does. We have a robust process
of internal review and discussion and debate. Time and again, our positions
have evolved. Good economic research does affect policy here.
We have seen this with capital flows, issues of inequality, issues of
fiscal policy, and on financial regulation. We learn from experience, we
learn from research, and we do adapt.
F&D: As you go back to academia at Berkeley, will your experience
at the IMF perhaps make you reevaluate some of your previous work and
conclusions?
MO: I have always felt that you should adapt your conclusions to reality
rather than trying to adapt reality to the conclusions you previously
reached. I think that my conclusions have evolved here, but they also did
even when I was an academic.
As is probably natural for someone as they age, I'll have less patience for
purely theoretical debates. It is important for policy economists to be
grounded in reality, to question the practical relevance of academic
conclusions, and to think more about the nuances and country specificities.
F&D: What advice do you have for incoming chief economist Gita
Gopinath?
MO: My advice would be that, just as at Harvard, you will learn from
amazing colleagues. There is an unparalleled store of knowledge in the Fund
about our member countries, and there is an abundance of wisdom and
experience. The opportunities you will have to interact with folks in your
travels—whether they are authorities, academics, or other members of civil
society—is a real privilege. Be prepared, not only to impart wisdom, but
also to receive it in abundance.
F&D: What do you see as the evolving role of the IMF?
MO: We have to incorporate a longer-term perspective into our surveillance.
We tend to look intensively at the short or medium term, but there has to
be more long-run thinking, so that we can better challenge authorities to
think about the distant future, far beyond the political cycle. And that
may require us to think somewhat more broadly, too.
We need to realize that we have a unique position as a long-lived
institution with a good degree of independence from day-to-day politics. I
think we need to keep in mind how special that position is, and learn to
exploit it more effectively.