The writer is a former central banker and professor at the University of Chicago
President Donald Trump recently met the president of the federal reserve Jay Powell, seeking to persuade him Reduce interest ratesRecalling the political pressures that the American presidents applied to the Fed in the 1970s.
Some investors may fear that US economic institutions be eroded, which could lead to macroeconomic volatility. However, these fears will probably be provided by the Fed holding stable on the rates.
There are still reasons to worry, however – not American institutions, but the evolution of the political environment in which they operate.
To understand the role of institutions in economic folklore, we must return in the 1990s, when it was easy to distinguish economic policies from the emerging market from those of industrialized countries.
The first were “procyclical” – the countries passed freely when the times were good, adding to debt and inflation, to be returned to reality when the times were bad and their ability to borrow. On the other hand, developed countries have adopted stabilizing policies; The United States has made major budget surpluses in the late 1990s.
Economists argued that the institutions explained the difference. The independent central banks of industrialized countries have targeted inflation, while their parliaments have followed the budgetary rules that have limited excessive spending and even required budgets to balance the cycle. The institutions were a force -style camisole which was due to the political opportunity.
Cracks quickly emerged in this explanation. In the 1990s, multilateral organizations and IMF urged emerging markets to adopt such institutions. However, even when the reformers took into account the advice, the policies continued to be procyclical, leading to a series of emerging market crises.
But from the early 2000s, macroeconomic policies in some EMS became more stable, while institutions began to have more political traction. The government of Fernando Henrique Cardoso has launched inflation targeting in Brazil, but the central bank only became credible when its leftist successor, Luiz Inácio Lula da Silva, maintained the independence of the bank.
The institutions have not changed, but the political consensus behind them did. Growth, partly driven by the boom of raw materials, has provided budgetary surpluses to help the most necessary. Programs such as Bolsa Família have allowed direct transfers to the poor, while others have improved access to education, health care and housing.
Precariousness has fallen. The incitement to Lula workers’ party to engage in political radicalism has decreased, which has enabled a large national consensus on macro-stable policies to emerge. The institutions began to work. Although prolonged periods of low growth exert pressure on consensus, in many EMS, it is still standing. The error by urging institutions on EMS in the 1990s was that there was not yet political consensus.
On the other hand, developed countries have undoubtedly become more procyclical. The United States has passed enormously while recovery of the pandemic was well underway, contributing to the inflation that the Fed always tries to control.
Trump’s “Big Beautiful Bill” threatens to expand the already unbearable American budget deficit. France and Japan also find it difficult to reduce debt / GDP ratios by more than 100% – something unthinkable in the 1990s.
It is unlikely that the Fed is institutionally lower. He quickly reaffirmed its independence Shortly after Trump-Powell’s meeting. Indeed, it does not matter who replaces Powell next year, it is unlikely that Fed policies will be flexible. In addition, it is not improbable for the Trump administration to host a scapegoat in case the economy moves south.
Political consensus in the United States has however changed. The Fed TODAY probably does not have the political room to fight against inflation as vigorously as in the era of Paul Volcker. Likewise, budgetary rules in the United States have not changed. The political will to respect their mind a.
Indeed, precariousness and inequalities have increased in developed economies. The disappearance of the well -paid work in the middle class for moderately qualified changes due to technological change, and to a lesser extent, is the obvious cause.
On the other hand, the very educated benefited because globalization has brought greater opportunities to those of white collars. For those who are left behind, radical politicians offer the persuasive message that selfish elite policies are responsible for their fate.
Consequently, the political consensus behind macro-stable policies has weakened, even the tax hawks of the GOP abandoning their opposition to expenses.
Balanced budgets require compromises. But when the policy is so polarized, little is ready to make them and the leak expenses become the standard. For some industrialized countries, sudden judgments, when the markets do not want to finance their governments, could be on the horizon.
Institutions do not provide countries with a post for macroeconomic nirvana – and they cannot create a political consensus. This forces citizens to believe that economic results are correct. This requires structural reforms that improve opportunities for those who are late.
Perhaps developed countries should start imitating what emerging markets have done.