Off we go. Thank you. Your feel. Very much indeed.
Now. This is a paper that I've written with Warwick McKibbin from The Iron You for the Ox Rep issue on economics and covered.
And as Cameron said, we had a number of papers in this about international cooperation of various kinds.
And this macro on trade, on macro, on finance and and on the funding of the World Health Organisation for a very different ones.
Let's get specific in this talk. For the next 15 minutes or so on macro issues,
everybody's been complaining about how this looks so different from when Gordon
Brown was running the world in the way that I love doing in early 2009.
I have to say, with extraordinary cooperation from Barack Obama and all those gathered in that summit in London in April 2009.
But when when we slid into the covered crisis, many of my colleagues turned to me and said,
well, listen, David, what exactly macro cooperation do you think is needed?
It's all very well, blah, blah. Let's cooperate. But fun and games is not what cooperation is about.
It's about a purpose. And here is the story of the key points about there being a coordinated macro policy response,
not yet content as what that should be with leadership completely missing.
And we'll talk about that in questions.
There will be a role for the IMF in the background and we're going to run this proposal through a model and show you just what a big difference.
What we've done wouldn't make. So what kind of.
I'm still the the rabbit isn't out of the hat yet, very deliberately.
What macro levers might we pull? Welspun excuse me?
Interest rates, a zero bound. There's nowhere to go with that.
Remember in after the dot com crash.
Zero interest rates cut instantly. Can't go there.
Of course, central banks are doing a remarkable amount of liquidity and confidence.
We prevented a financial crisis happening as a spill-over from covered in a very remarkable way.
And there's a whole seminar about that. But I'm not going to talk about that today. Many countries have loan guarantees.
And there's a whole lot of micro stuff to discuss about support for firms.
But I still haven't got there. This is where I'm going to fiscal policy.
And let's skip forward one slide and I'll come back to this one.
Just look at this extraordinary picture from the IMF fiscal monitor, which shows spending in red as a percent of GDP on on the right hand side of.
With the G20 as a percent of GDP, very large numbers.
Look at the United Kingdom, much lower. But look at the US and Australia.
Thirty three percent of GDP. These are very, very big fiscal numbers.
And the revenue meant merit measures are much larger in Italy.
I said that wrongly. The equity and particular the guarantees are much larger and loans.
And we've all got reservations about loans because they have to be repaid.
But you will see just what a huge difference there are across countries, some of which have been able to do it.
And others now go to the left of the picture Mexico, Turkey, Russia, Indonesia, Saudi Arabia, India, in particular, Brazil, tiny numbers.
And you ask, why is it. And let's just get a picture of how big this is.
I've never done seminars or or simulations in trillions before this new world for me.
But pin down the numbers. U.S. GDP is about 21 trillion.
Well, this picture from the IMF fiscal monitor adds up to 10 trillion.
The world is injected to two to help fix problems in domestic economies, not cooperation across leant across countries is just spending at home.
So it's our furlaud and our job, Australia's job guarantee.
And those does that is the very major part of it, that there'd be no large fiscal expenditures and.
The this paper is all about Mexico, Turkey, Indonesia, India, down there on the left have not been able to do this.
Answer the question, why not? And sir, if they tried, there would be a currency attack.
The international financial markets worrying both about increased fiscal debt and deficits and the increases in debt,
but also about the current account deficits that these countries will run and worrying about whether the country itself would become insolvent.
So in the back of this imaginary G20 meeting in Saudi Arabia later this year that agrees this, they would have to be cooperation.
From the International Monetary Fund and international agreements to make that cooperation possible so that,
roughly speaking, this Fickett financial security of countries that did this would be guaranteed big ask.
But central to the story now, what are we?
Thinking that the gains to coordination would consist of this is a coordination which simply allows some countries,
the ones on the left of that picture that haven't had a fiscal expansion to do an expansion,
more like what is the particular picture for the countries on the right?
And also, we believe, important to study and to investigate is we think that an agreement of this kind would reduce global risk premia.
Now, wait, there's a long story about this and fitting this model to the data which McKibbon has done with great care,
has involved a lot of thinking about risk premia. And I invite you all to have a look at it to investigate what he's done and how.
We have in stimulating how bad the world is before the problem begins.
There have been increases in both the risk premium, which people apply to their future permanent income.
An increase in the risk premium applied to most countries relative to the US, the US being the safe haven.
And thirdly, and importantly, a very significant increase in the equity risk premium.
Now, what we've done in in our simulations of the base run before we start this game off is imagine that those
risk premia to discounting of disposable income and country risk premia a large in the first year,
half in the second year and all gone again in the third year, even in the bad world.
But the bad world with continuing Kovik problems,
we imagine no immediate move to solving the the the the vexing problem of still contains an equity
risk premium in it in the of the base from before out our exercise and why this is all on the store.
On the screen. Is that what we've imagining and what I'm going to show you?
It's the cooperation between countries fiscally is also combined with a reduction of the equity risk premium,
because everybody can see the cooperation between nations acting internationally.
Just before I show you the results, just remind yourself of past exercises in international cooperation.
It's not a Mary story. The only good story there are two and there are two or three bad stories on this page.
One good story is way back in 1980 with the second oil crisis.
There was a genuine global cooperation by nations together to fiscally stimulate.
Much like your own in the early 90s, there was a considerable discussion about cooperation with monetary policy in an inflationary world.
People were concerned and this was a Thatcher Reagan game played out amongst people amused.
In economic seminars suppost, Thatcher does a very tight monetary policy and appreciates the exchange rate of Britain,
then that will make imports into America more expensive and imports into Britain cheaper and will lower our inflation and push up theirs.
Well, guess what? The US would do the same to us and to world game would produce a really bad outcome.
Cooperation would involve them understanding not to do this.
We all know the cooperation of this kind didn't actually happen,
but it was where much of the initial understanding about international cooperation in macroeconomics was first thought about,
discussed and worked through. Next was the GFC in 2008 09,
where the cooperation led by Barrack Obama and Gordon Brown involve very great fiscal expansion of the kind that I'm gonna be talking about here.
But a grim story, it's to remind you of what happened just a year later at the G-8 20 summit in Toronto in 2010.
When our chancellor, George Osborne, teamed up with WUST, with Scheidler and with the US Treasury to cooperate in austerity,
austerity led to much less fiscal work in helping solve the crisis than most people thought desirable.
But it also led to countries trying to do quantitative easing and depreciate their exchange rate and steal jobs from each other.
The cooperation and austerity turned into exchange rate warfare in a way that was extremely unsatisfactory.
What we're trying to do is something most like what it says on this slide about what happened during the GFC.
What's the numbers? Very large numbers.
You remember I said that US GDP is of the order of 21 trillion and advanced
countries at the moment have stimulated to the extent of about 10 trillion.
Huge numbers. The McKibbin Vine's exercise in this paper that I'm talking about would put an extra three trillion
onto government debt in the countries of the kind I've described over a period of five years.
Let's pass quite quickly to the results.
But just before I do so, I want to just say a little bit about how to reach an agreement.
Just as the slide and I flicked back here about international cooperation in macro policy doesn't produce very many good pictures stories.
Part of the reason is that international cooperation is a very particular kind in a world where there's no political oversight.
Because, of course, no global government.
And those those of you in the audience who worked on the IMF and the World Bank know very well about conditionality,
namely an international institution imposing requirements on countries which are given benefits through the international institution.
That's to say you get a cooperative global assistance.
But there's people there in the background going like this, making sure you do what you're told.
What we're advocating is something much more like 2009, get together.
You identified the problem. You agree what's going to be done.
And then you let countries get on with doing it themselves. No.
Enforce conditionality. A little footnote disputes in Europe about the way that Greece and Italy have been treated by the European Commission.
That's exactly the kind of issue that I'm footnoting here, which could have a much larger discussion in our questions and in further analysis.
We talk a bit about it in the paper. Now, here's some pictures.
And I'm sure you can just about read the top line, which says for the critical countries, which I'm going to identify as.
A two and a two GDP goes up by two point seven and two point four percent.
Very large numbers. As a result of this injection, now I'm going to tell you a bit about what countries are the A1 countries or all down below.
You can see all the places like Australia, US, Canada, France, UK that have already done the fiscal expansion they need.
These are countries standing here saying international cooperation involves us helping the rest.
Right. So there's got to be some rest. Well, let's divide the rest into the rest amongst advanced countries and the rest in the best of the world.
Well, who are the rest amongst advanced countries who haven't been able to do the fiscal expansion that they want to need?
Well, at the time of the writing of this paper, the answer was basically Italy,
Spain and some other members of the European Union held in place by the European Union's fiscal rules.
And the Financial Times and other papers were just full of complaints about how the commission was preventing them doing what they look across.
Germany, France and Britain and say, this is ridiculous. We're not allowed.
You and I all know that there's been an agreement last week for tooth and nail to the end,
but the European recovery from fund, what's not yet clear is how much Italy will actually be able to do.
But you might say that Italy is big for Spain.
Few others have been pushed in the direction of McKibbon and Vine's and smile and say, isn't that a good idea?
What's the. Non advanced country, emerging market country, that's done all it wants.
Well, there's only one of them in the E one column, that's China.
And China is not constrained internationally and is being enabled to do exactly what it wanted.
So the real deal is e two countries. And look at the bottom of the list.
It goes on and on in alphabetical order.
Argentina, Brazil, Indonesia, India, Mexico, Russia, Saudi Arabia, South Africa, Turkey and the rest of this and rest of that.
Heaps of countries, all of whom in this simulation have been entitled to do this massive fiscal injection.
That is six percent of GDP in the first year.
Four percent in the second year and two percent in the third year, mirroring how badly the Cauvin shock is at the beginning and dwindling away.
Discuss why. Dwindling and blah, blah. Later on. I've just given you a picture of the shape of the process.
And so the big deal is the E to countries with GDP going up by two point two percent.
Now Koven is close to collapse in GDP of a number order of 12 or 13 percent.
So this is no McKibbon and Vine's on fixing the world. But this is a very big media gracian of the problem.
And if you look at the employment numbers, they're very significantly larger.
And that's because the the the detailed work in the model we're using enables
us to talk about a reduction in real wages in the countries that does this.
And also changes in relative prices to two things that enable employment to go up quite a bit more than GDP.
Essentially, this stimulus in enables expenditure to go up by those who receive the income from
the stimulus and the expenditure is concentrated on labour intensive industries.
That's the shorthand version of the story. That now look at the fiscal position ratio of GDP in the first country.
The budget deficit. And we've got the numbers there.
Minus means, but that the deficit's got worse.
And in the two countries, minus one.
One trip. Don't get the numbers right. What a trillion. Three hundred billion.
Why? This is a tax cut. Tax cuts cause increased fiscal deficit.
Look at the current account position. The trade deficit. The trade deficit of these countries, minus 715 billion.
A very big trade deficit. Because you're stimulating the economy by cutting taxes.
Let's now let's look at what happens to the rest of the world. Well, the rest of the world benefits.
Why just straightforward locomotive effects, expansion, expansion in one part of the world.
Saxen. Imports from the other part of the world.
So there's an export boom in the parts of the world that aren't doing this.
That's a positive. I'll let you spend more money. And when you spend it, some of it will be spent on my stuff.
Roughly speaking, is is the simple version of the story.
How did it work? Well, a straightforward open economy, macroeconomics tells us how it works.
Fiscal expansion by tax cuts in all that long list of countries leads them to have more expenditure,
more less deflation than they would have been depending on the details of the simulation in some countries, actually, some more inflation.
Take a monetary policy. Remember that we're talking in the covered world in which monetary policy has been very loose.
So what tighter monetary policy means is not quite as loose monetary policy.
That's how we run, um, the McKibbin model. And and of course, the currency will be not as depreciated as it would have been.
That's what you'd expect.
These external emerging market countries have suffered very significantly because of falling exchange rates as a result of Kofod,
the collapse of their export revenues, being able to expand and to have tighter monetary policy than they would have.
And having a more appreciated exchange rate is all part of a good package.
But what do we see in the other countries? You and me, in advanced countries, we will.
Somebodies appreciation is somebody else's depreciation. So not only do we have locomotive effects of of of Mexico and Brazil and whatever.
Purchasing more of our imports, but also our currency is somewhat more depreciated and more competitive.
And we export more. That way. So you would expect me to say that this is all a big deal, wouldn't you?
It's a big deal. You'd expect me to say it's a good deal.
But we come back to where I began, and this is open for questions that needs to be leadership to make this happen, which is just not there.
And in particular,
there needs to be support from the International Monetary Fund that would enable the countries that I've described in that long list to be able to
achieve the extra budget deficits and the extra current account deficits without being subject to international speculation and currency attack.
So that's my story. Thank you very much. Fantastic, David.
Thank you very much indeed. Now, after a brief Q&A with me, because I'm going to abuse my position as chair here and ask you some questions directly.
We do have time for Q&A. This three lined up already. But if you wish to ask David a question, do hit that.
Ask a question button on the bottom of your screen. So to kind of I'm a simple person at heart.
And what I'd like to do here is just really cut to that the what, how and the why here.
So I stop auditors to talk. Indeed, as I was reading your paper asking, why isn't an individual national response here enough?
Why doesn't individual nations just doing what they naturally would think to be in their self-interest?
Why doesn't that add up to something sensible? At the global level?
And the first point you've made is that while there's an awful lot of countries who actually can't help themselves here.
And so part of the story is simply kind of helping your neighbour when when they're literally down any of that, people are dying.
And the reason they can't help themselves is because they've got limited fiscal positions, concerns about debt and currency attacks.
So then the question is, well, what what can we do to help them and where we can chuck them a whole lot of cash
in in the form of IMF related facilities or others come back that second vote.
But why would we do that other than just the goodness of our hearts?
And you've given us three answers to that question. I mean, the first is that there is this Lokomotiv effect.
If half the world goes down to half the world's demand gone in the whole year.
You end up with a global recession. And I'm wearing a mask as well. So no human is an island and our economies are all interconnected.
That's life. That's for me, the big reason.
Yet the second reason you've given is reduced risk premia, which, as I understood it was firms need to be confident of future demand levels.
And if you've got a large, coordinated, clearly communicated multinational governmental stimulus,
then firms are going to think, okay, it's going to be. It's gonna be all right. I'll invest and create jobs and so on and so forth.
And then third one you gave was because actually, if we are to have an expansion,
you want a balanced expansion and just an expansion by the A1 countries doesn't give you balanced economic activity around the world.
So I think that's the core of your argument.
Now, if I come to a key question, actually, it's in the in the list of questions being asked by someone called Cucchiara Kajita.
How does this actually work? How's it govern? Obviously, the IMF could take a number of actions here.
But the IMF is perhaps not beholden to its member state countries.
But it has to. Has to work with them. So what exactly is the pathway?
Not in an ideal world, but in a kind of plausibly realistic world.
Who should do what? Here to make this coordination real.
Well, don't put Italy on one side, but a member of a monetary union.
We'll come back to that. All the other countries that I've described are a show that.
The countries that manage their own monetary policy, they can.
Literally do a tax cut. Big numbers of the candidate described which injects more money.
Now this in in elementary macroeconomics one on one.
This is an outward shift of the ice curve and it will be appropriately dealt with by monetary policy if there's no inflationary pressure.
Then the L.M. curve will simply simply shift out with it.
If we're in the world with studying in our model, whether it's something like a Taylor Rule in place,
the interest rate might rise a bit in order to manage the inflationary pressures.
But it's a it's a fiscal expansion that creates extra public debt.
And monetary policy is accommodating and constraining only to the extent that it's inflation so everyone can get on.
Tanyalee said, get on an aeroplane after the G20 summit.
So virtual just simply turn around when they've done it and say, okay, guys, this is what we're going to do in our parliament tomorrow.
That's at home. But what's the global stuff?
Well, in that I think back to the Asian financial crisis,
rescuing Korea or involved those bizarre meetings in hotels in Seoul on Christmas Eve and the IMF didn't have anywhere near enough money.
So the point I'm wanting to make is there had to be there in a big whip round and and that would need to be a very big whip round.
In addition, the IMF, the kind of numbers the IMF has.
Is that the order? Depends who who's borrowed was aware of between half a trillion and a trillion trillion
max totalled the very small number in in the kind of calculations that we're doing here.
So we're we're looking at international cooperation, hopefully in a more orderly way than just a straight whip round.
We'll look to live on the telephone, as it were, Christmas Eve.
Look look at how badly we've done so far. There was a push at the G20 meeting in April to increase SDR special drawing rights,
which are for those of you who don't know, the International Fund,
Monetary Fund, magic money that actually made up internationally out of no contributions, but they contributed contributing nations.
This would have been the right time to have an SDR increase. The push was for something like 300 billion.
So it would have been a given that the fund's numbers are between five hundred billion trillion.
This would be very important. Didn't happen so long.
And so to a short question, and it can be turned into one sentence.
SDR increase, please. OK, great.
SDR increase plays,
but actually no real prospect of anything at the size and magnitude that would be commensurate with the trillions that we would need.
We're talking hundreds of billions still in a good scenario. And that kind of brings me onto the second question.
What's the role, do you think, of debt relief here?
Because part of the challenge for the countries who can't help themselves is a debt overhang or the fear of one.
Could we be thinking more cleverly about deals?
Do we need a few kind of souped up investment bankers doing debt for nature swaps or debt for something swaps?
Yeah, that where there is a deal to be done that is in both parties interests and in the collective global interest.
Very definitely. If your. Your and my friends in the audience would like to tune in next week.
Chris, Adam, we'll be talking about precisely this. I'm just flicking my paper to see where sub-Saharan Africa comes in.
In the regions of the McKibbon model. And I have to tell you,
it's called rest of the world because sub-Saharan Africa is quantitatively very small but catastrophically
damaged by covered because an and and a very simple understanding is that the prices of Meningie,
many of their exports have collapsed with the collapse in the terms of trade that cosiness caused.
So they're short of revenue, but they're already heavily borrowed and they need like us, look at the news headlines every day.
Countries in Africa unable to do what we've done in supporting our populations in this time of debt relief.
Absolutely central. And Chris had the number I'd taken.
Chris Adams done a whole paper on this for four our trip, which is a very interesting piece of work.
And it fits absolutely like that into the McKibbon Biden's exercise.
And the numbers look like between two and three times the normal amount of aid just sub some higher in African countries.
That's not kind of excuse me, could we have a 20 percent more aid?
This is kind of more than doubling. And now globally, the numbers are small.
That's still that's still only talking much less than five hundred billion.
But but for these countries, it's absolutely make or break. Thanks.
There's a very good questions here in the list. And let me just group some of them together.
Quite a few relate to really the concept of uncertainty.
Yeah, there's uncertainty as to whether we're in a recession or depression, as Patrick points out.
There's uncertainties whether we'll have a vaccine sooner or later or ever.
And there's a big kind of uncertain question about, as a result, how much money he needs to be on the table.
What is good macro coordination look like in these sort of circumstances where we face some pretty deep uncertainties?
Very good question. I suppose I would go back to the global financial crisis and look at the mistakes that were made.
I'm going to give you an evasive answer, which is that we will we will certainly not be able to do whatever it takes.
That magic phrase. So I'm going to turn around and say it.
It will be helpful to do whatever it is possible, because whatever that is will turn out not to be enough.
Properly evasive answer. But look back what happened after the global financial crisis.
When the package in London, two percent, much smaller numbers than now,
two percent global fiscal stimulus and an agreement not to put up tax rates when when there was collapse in fiscal revenues.
Perfect for a year. And then they all got to get together in 2010 in Toronto and started doing austerity and wound it back.
The real risk is that intelligence known as big as what we're proposing here.
But whatever can be done is at risk of the debt maniacs doing exactly to sensibleness
what the debt maniacs did to sensibleness after the global financial crisis.
So there's absolutely no risk of us doing too much. Yeah, I know.
No, I'm fine. So we do we do what we can and that addresses the uncertainty.
Now, there's another cluster. I have to defend that in the following way.
That covert is a supply side problem. And there's been much discussion about, well, you know, Martin wouldn't man,
we went into inflationary problems short of stuff because people aren't working.
It's supply side issue. That's the work that work and I've done and many others have done suggests that.
The demand repercussions of this supply constrained.
I nearly said much larger. Certainly larger than the supply side problems.
Why? Because it's depressed investment, although people will consumption smooth and bad time.
You spread it out. The difficulties that would tend to make you think that this is a supply constrained economy.
But if everyone's pessimistic, go back to that. And so to about the future, they will invest less.
So you add the investment reduction to the consumption smoothing kind of partly reduction.
And the modelling shows you get really bad demand shortage. That's why I'm not worried about inflation and I'm not worried about the debt.
Austerity's. But I thought it important to say that because otherwise this kind of response about supply shortages of.
Yeah, fair enough. And this is clearly a big issue.
We will go into it in further detail in this series on the 16th of September with Professor John Farmer and Maria Del Rio,
Nana Nikpai from the impact of the supply and the demand shock of Darwin tonight and that group.
You know the paper. Indeed. We talked a lot about. Great.
So I was moving on to another cluster of questions, John is having that question voted up six times and voted twice.
And this is around the interrelationship between macro economic cooperation,
on the one hand, and cooperation on health and health care and climate on the other.
And and then relatedly, how progress on the health side and the vaccination side effects development affects these economic issues.
Is is it feasible that you could imagine either strong cooperation economically with no cooperation on health and climate or the flip side,
strong cooperation on the health and the climate side? But actually, we can direct together on the economy.
The big deal question. And it takes us right back to 1944, Bretton Woods people in the run up to Bretton Woods.
There was a push to try and do everything. Let's do trade as well and let's do the other stuff as well.
And an intelligence said, let's head focus.
And they did defunded the bank and then they did the W.
What became the gaffe in San Francisco? Two years later, in 1946 and 1945, they did the U.N. but I, I, I.
I think focus is important. That's point one, but point two.
They've got to be positive externalities across these cooperation areas so that if you cooperate macro economically,
you're going to be helping fund stuff on the on the disease reduction.
If you just adopt speaking too loosely on on fighting covert and stopping deaths
and enabling enabling people to have a better world in which to go back to work.
So my McKibbon sex stuff provides money for that stuff.
But that done well would of course make the macro environment better.
So it's obviously important to to do that.
But but. But but but. But I'd caution against jumbling it all up in a big global deal.
Let me just have a footnote for smiling. Cameron is he's got the paper on or on the green recovery.
Now, the McKibbon Vine's paper was very deliberately evasive.
We just cut taxes but stuck it in the mobile digit numbers.
But, of course, you would not want to just cut taxes,
try and do fiscal stuff in a nearly set of focussed in the particular direction sort of way so that I can see your cooperation,
you oblation and the Cameron Hepburn stuff as well. Well, I have to say,
I'm pleased to say a few questions along those lines being posted by I won't prioritise my
own personal interests unless they get voted to the extent that I can't ignore the people.
But actually, on the on the question of Bretton Woods and how to put this together to do we
learn anything from the fact that the EU did manage to get its act together and,
as you say, hammered out at great length, under great duress to the last minute, etc.?
Do we learn anything positive or perhaps negative about cooperation and how it can or should work from the EU recovery fund?
That's Valerie's question. Very good question.
So I'm going to. He Valerie, Valerie's my attempt to take that question and run and say the.
Bignone Cauvin Macro issue in the world is U.S. China trade.
But it's all tangled up with China and the belt and road and chain tension in Asia about China.
Now. As a student, the Bretton Woods.
I like telling this story about Kanes because it is illuminating in a very cange like way.
He was asked just before he died. To face up to reality and reality was the dispute about Lend Lease treaty.
And the famous Article seven of that which gave the US because it led to all this money to the UK to fight the war under complete, uncertain terms.
But it was a lone gift God knows was just money by some warships.
But Article seven gave the US the right to insist on the conditions of it, of the reconstruction of the world order afterwards.
And guess what? These preconditions look like pulling to pieces.
The British Empire, including imperial trade preference.
And this person said to cheque Kanes for Britain, the post-war.
Priority is preserving our trading position in our trading partners against global attacks on our markets.
It's a trade issue. Why? Why, Meinhardt, if you have spent the last three years worrying about the international monetary system.
And Cain said, now I'm turning in this dramatic rhetoric and so in the speech says,
until you've sorted out the macro, you can't begin to do the trade stuff properly.
And his particular story was you just start doing trade calculations and then exchange
rates change violently and you don't know what you're doing in your calculations.
Now, there is in the Trump China trade war stuff,
there is a complete misunderstanding that a lot of the US current account difficulty is and and including now,
I'll say it this way is about what economists would call absorption, the amount of expenditure at home relative to our poor production at home.
So it's the level of demand rather than the ratio of relative prices.
It's fundamentally driving that trade position.
Furthermore, people who think about it sensibly understand that international trade is a global network of stories.
And for the US, what matters is the overall trade position, not its particular trade with a particular country,
because that all maps out and global criss-cross of trading relationship between countries.
So to the questioner, I would say.
Understand? And to my country, previous ones most.
But the most famous Australian contribution to. Macro economics, in fact, economics in total.
The famous thing called the swan diagram.
And this shows that for a country facing an external position, what is important to get right is both its relative prices,
which includes, of course, protection and or exchange rates, but also its ratio of expenditure to income and an untrained macro.
Economists like me go around the world saying, let's try and get the macro right so that once we've done that,
we can then begin to think about these trade problems which people fighting each other so hard about.
Okay, fair enough. Is a good question here, which directly relates that, which is how will we know when we've got the macro right.
So, so. So at what point do you say enough is enough. Yeah.
Well when do we start. How big is this need to be.
Now I guess in some currency events that by saying, well, we're not going to do a big enough response.
So, you know, forget it, just go as hard as you can. But presumably that there's a separate question going as long as you can.
Surely this doesn't go on for five years. I mean, how are we going to know when when we're when we need to stop it?
Is that related to the vaccine? I think absolutely, yes.
Just imagine if our life is like this still six years time from now.
I'm along with many people trying to figure out whether we can cross the English Channel for a holiday next month or not.
Just imagine if your life is is going to be like that.
So the uncertainty is hugely important.
Here's here's an institutional response to your question.
How do we shoot it? So I'm turning your question into how we sure we're not doing too much.
Well, guess what, in a world of great uncertainty. What you need is trusted institutions.
To not not not constraining rules, but delegation to institutions that you trust to to to respond well in the circumstances, he says.
Come on, David. Could please be a bit more precise. Important part of how we'll know.
Two paths. Whether we've done.
And now for too much is, of course, the inflation problem and.
The resilience of central banks that stand for.
Of course, financial stability, but also price stability.
That's to say inflation. We've never gone for zero. Not above it as a steady, low number.
And and. So one answer is when inflation threatens, we'll know we've done nearly too much.
That's that's a way of turning that question into a process advancer of an institution that you trust.
Dealing with it. I have to take the second one. When will you know if motoring madly towards levels of public debt as high as in Japan?
When. When will you know if that's just madness and too much?
Well, the answer will be when long term real interest rates look like they're going to start seriously rising.
And that's why we've established our fiscal council.
It hasn't had to do very much in the last five years except mainly pronounce about the reliability of forecasts.
When people thought the politicians were cheating, well, that's important also.
But its fundamental purpose is to help us understand this set of questions about public debt.
If we got central banks, we'd trust. And in fiscal counts,
the Europeans now have fiscal council institutions in in much of the European
Monetary Union architecture with those that see you see how either they didn't.
The specific question by giving an inch. And it's not evasion really.
It's properly replying to the question by giving an institutional response of processes that we trust.
And we've got time for one more. I'm afraid the question on is, I'll leave this with you to ponder.
David, do we really want to be risk stimulating our economy when we know we're on a pathway to catastrophe on the climate side anyway?
That is the question that I'm not going to ask you to answer, because it's been voted on.
Look, look, look, I know I'm going to die between now and some time, but I do want to have a holiday in Greece before I die.
That's my frivolous start to that question. You've been listening to derail the conversation,
so I'm sure you could take on on a synthetic fuel that's carbon neutral or ammonia or take a beautiful piece like a log train journey or something.
But the real question, the last question is on populism.
So how do we deal with macroeconomic coordination and the kind of macro politics, given the rise of populism?
I mean, you could look at this and say, well, the populists haven't been doing so well.
They've been ignoring the science. And lo and behold, when you do that, you have a bit of a disaster.
But how does that affects the propensity of some of the key states to actually come forth and cooperate when actually they're they're pandering to,
you know, frankly, domestic instincts within the voters?
Very good question. And I'm going to give you a strange answer.
Proud of my own original home country, Australia. Australia had a really bad set of macroeconomic policy institutions at its centre.
Extreme protectionism. And it did battle with Argentina in the 1960s to be the most heavily protected country in the world.
And and the institution that. There were some very important economists.
Many of the audience will have heard of Max Corton lose his idea to a fundamentally important in teaching Australians about the madness of that.
And but there is also an institution caught what's become the Productivity Commission, which is a widely trust.
I heard one of my respected colleagues in Australia describing this institution up there with the Central Bank of Australia.
And I would say this wouldn't go along with the universities as the three great kinds of institutions of state in the country of Australia.
And this Productivity Commission is a place where trusted economists, yes,
trusted ones are asked to write detailed reports on questions of national interest,
which inevitably involve weighing up costs and benefits of policy changes.
And this is it. This is not inviting the question.
It's about populism, because protectionist was protectionism in Australia was was a very populist kind of strategy in its heyday.
And and what this institution that's done is enable the Australian polity,
the Australian civil society, to begin to understand how to think well about economic questions.
And and I'm actually working with some colleagues at the minute to push for
the establishment of such institutions in my my adopted country in Britain.
Because, of course, Liko if everybody I'm thinking about Brexit,
but I'm also thinking about the reform of health and social care and all these deeply
important political economy questions if analysed well by people who are trusted.
We'll make a big difference to populism if it's it.
You would say that, wouldn't you? A university professor thinks that the power of ideas might help win important battles.
But I actually think it's true.
Well, I'm I have some doubts about some of the things you just said, but I certainly have no doubt about the importance.
So that is one way or the other, whether they are populist or not, in driving much of much of what happens.
So that's a good place on which to leave it. David, you started by saying there are some big issues here and you would say that?
Well, I think nobody is deny you the facts that talking about an issue where literally 10 trillion has
already been put at stake and probably another 10 trillion is going to come is a big issue.
It clearly is big. We've got a few more big issues to address in this series before we're close.
Next up tomorrow at 3:00 p.m. is Professor Chris Adam on the economics of the pandemic as it relates to sub-Saharan Africa.
And then after the summer break,
we'll come back with the talk I mentioned from Dan and Maria on the impact of supply and demand shocks on industry and occupations.
Mariana Masakazu familiar name, I suspect to many of you on the thatching to vote of October on a nicely titled The Big Failure of Small Government.
And with any luck, a sneaky sneak preview that we may have.
Yulia Kisa from the Bank of England,
who's done a paper joint with Andy Haldane on more of these sorts of questions around the around the treatment, fiscal economic side of things.
So stay tuned. Join me for sub-Saharan Africa and the pandemic tomorrow at three p.m.
Thanks very much, everybody. Thank you.