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The IMF’s Jonathan Ostry Talks Inequality and Globalization

Jonathan Ostry, deputy director of research for the International Monetary Fund, and 2016’s 99th most powerful person in finance

Q: You coauthored a paper earlier in the year calling into question some aspects of neoliberal globalization, especially austerity measures. In a nutshell, what is your critique?

A: It’s evidence-based, not ideological. Really what we were trying to say is that you need to design fiscal consolidation [austerity] in a smart way, and you need to design financial openness [international capital flows] in a smart way. It’s more about intelligent design.

There are a lot of people who feel, and are right to feel, that they haven’t participated in the fruits of globalization, that they haven’t gotten their share, and there’s a lot of unhappiness about that. The path forward is not to become like North Korea and close yourself off, but it is to sort of try and understand why globalization has in the past 10 or 20 years not delivered on broadly shared benefits as much as could be the case. That’s basically the starting point: better managing globalization rather than rejecting it.

Specifically in regards to austerity, who does it work for and who does it work against?

Some [countries] have to undertake austerity because their backs are against the wall. Basically markets are not there to lend to them anymore, and they have to curtail their spending, raise taxes and run larger budgetary balances because they have no other choice.

But there is a range of countries whose backs are not against the wall, and there is a school of thought that says that lower public debt is a virtue in and of itself. The argument goes that low public debt means that you have less need to have high taxes to service that debt in perpetuity forever. Low public debt is also good because it gives you more freedom to respond to bad things, bad shocks, when they occur, even if they occur only every seven or eight decades. Those two arguments for low public debt are perfectly fine, but what the people who make those arguments often fail to take into account is that you have to get from here to there.

In other words, the consequences of reducing debt and running larger balances can often be worse in the long run?

When we have a lot of public debt, as many advanced countries now have coming out of the global financial crisis, you have to actually either raise taxes, which itself is distortive, or you have to forgo infrastructure or other production spending to get to that low debt. What we were highlighting…was basically you need to do a cost-benefit analysis and you need to sort of figure out what those transitional costs are to get from high to low public debt, versus the longer run gains of being able to respond to stuff.

And does austerity work?

Some people can’t do that cost-benefit analysis, and they have to consolidate. Some people—the Germanys of this world, the United Kingdoms of this world and I would argue the United States of this world—do have a choice. They have a choice about how, whether and how fast to consolidate, whether and how fast to bring down the public debt. Public debt’s a big issue. There’s also the fact that we have variable global costs, we have pressing infrastructural needs, we have people that are not protected from a lot of economic stuff.

So having lower national debt can be good, but it shouldn’t be the only goal.

Basically, you don’t want to just have the debt ceiling, the debt goal, being the only thing that’s on the table when you discuss those kinds of issues. You want to do it in an intelligent way. [There’s this idea] that there is a very small growth cost to fiscal consolidation. In fact, we think that in many situations the multipliers could be very large, and so you could end up hurting yourself more. The flip side of that is that sometimes expanding the fiscal debts can actually be a free lunch. I’m not saying those are normal situations, but when Larry Summers and others argue about infrastructure spending potentially moving to a lower public debt ratio in the future, I think there’s circumstances in which that is the case.

Over the past five years you’ve also written pretty extensively about progressive or redistributive tax systems and how they’re not something people should be afraid of. Is the IMF responsive to the kind of research you’re doing?

I think the IMF has shifted an enormous amount. It’s evolutionary. It’s not going from black to white. I think that the global financial crisis itself was an important catalyst. When you look at a range of issues, like the management of international capital flows, the IMF is much more open now to an proactive management of those flows and to designing policy tool kits and [the use] of capital controls to manage and improve risk-reward trade-offs in international capital movement.

What is your current thinking on economic inequality?

Some people make the mistake of thinking that what is of uppermost importance is sustained economic growth—getting the efficiency conditions of the economy to cooperate as well as they possibly can—and thinking that you can assess those kinds of things in isolation from distribution. One of the things that I’ve learned through my work, and I think that has now been accepted at the Fund, is that you can’t really separate ideas of sustained growth and economic efficiency from distributional questions. What that means is that societies that are more unequal tend to have much more fragile economic performance. They might be able to ignite growth, but they find it much more difficult to sustain it. Maybe the key to development is being able to sustain economic growth over very long periods of time. Countries that you might think of as basket cases can quite often get a growth spurt going, but it fizzles out pretty fast.

So lower inequality leads to greater growth on a national level?

It leads to greater growth and more sustained and sustainable growth. Those are the things we learned. You also asked about redistribution. Basically, the issue is, how do you engender, how do you engineer that greater equality? Often people talk about pre-distribution policies, which are better access to education, better access to health, to nutrition, to the credit markets, even to the political process. There’s no conflict between pursuing policies aimed at improving the pre-distribution—aimed at fostering conditions where people can make their way better on their own steam—with redistributive policies. The problem with redistributive policies…is that people worry about efficiency lost from the redistributive policies themselves. You take from the rich and you give to the poor, and what gets lost is economic efficiency. What we asked is how large those losses are, and what we found is that on average in countries the losses are pretty small.

We wouldn’t want to apply that kind of reasoning willy-nilly to any country at any time, but what the macroeconomic data suggest is that on average across countries and across time, those distortive costs from redistributive policies—and what governments and fiscal institutions have actually done by way of redistribution—had not had a large growth cost. And the great equality that those policies induce all across the industrial world and increasingly in the developing world have been very much protective of economic growth. In fact, some degree of redistribution, as long as it is not extreme, can actually be a win-win pro-growth policy.

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