The deepest economic crises are also crucibles for new economic thinking. The Depression led to Keynesian macroeconomics. The second world war cemented support for the welfare state and the mixed economy. The inflationary 1970s and the oil shocks propelled free-market ideas to power.
We should expect the coronavirus pandemic, which amounts to the greatest peacetime economic disruption in living memory, also to lead to big shifts in the consensus on what is good economic policy. To see the direction of change, look to that guardian of economic orthodoxy, the IMF.
Every year, in the lead-up to its annual meetings — the 2020 forum is about to start — it publishes the “analytical chapters” of its flagship publications. The growth forecasts issued at the meetings are what will hit the headlines. But the underlying analyses often provide deeper insight into changing economic conditions and the shifting realities of economic policymaking.
IMF economists are hardly at the forefront of radicalism, but they have often shown the way once the world’s economic policymaking elites are ready to move. In the past decade, IMF research has lent authority to several reversals of the pre-existing consensus (and its own previous views), such as giving qualified approval to capital controls and upgrading the effectiveness of fiscal stimulus. It has played down the harm it expects from high public debt. In each case the IMF imprimatur has made it easier for national governments to shift policy in the indicated direction.
So what is the fund’s thinking today? Its three latest analytical chapters are all noteworthy. The fund’s Fiscal Monitor analyses public investment, which has been on a downward trend since the start of the millennium. Its researchers find that, provided it is well-directed, public investment is particularly powerful in uncertain times. The most striking effect is