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Unedited Rush Transcript Post-Crisis Fiscal Policy Philip Gerson, International Monetary Fund Abdelhak Senhadji, International Monetary Fund Carlo Cottarelli, Commissioner of Public Spending Reform in Italy Vítor Gaspar, Former Minister of Finance of Portugal Maya MacGuineas, Committee for a Responsible Federal Budget Adam S. Posen, Peterson Institute for International Economics Peterson Institute for International Economics, Washington, DC July 14, 2014 Adam Posen: Ladies and gentlemen, welcome back to the Peterson Institute for

International Economics. We are delighted today to have another of our events working with our friends at the IMF releasing this spectacular and frankly monumental work Post-Crisis Fiscal Policy. Since I’ve been summoned to be one of the commentators, I am excited to have us led and chaired today by a far more distinguished individual, José De Gregorio, who is now a nonresident senior fellow here at the Peterson Institute, former governor of the Central Bank of Chile, professor at Universidad de Chile and of course someone who’s been very active in the macro policy and fiscal debates in Latin America and worldwide for many years. So let me turn it over to José to host today’s event. Thank you, José.

José De Gregorio: Thank you very much. It’s a pleasure to chair this session. One gets

tempted when there’s such a deep and long and interesting book to start commenting but that’s not my role. But now, we’ll discuss post-crisis fiscal policy [inaudible 00:01:12] market from the point of view of the IMF. There were so many changes in the policy prescriptions and there are so many challenges in the fiscal policy debate that is of course a great contribution by staff people, 21 chapters.

So we will start this presentation with a presentation of the book by

Abdelhak Senhadji who has been the assistant director of the IMF Fiscal Affairs Department since 2011. He joined the IMF in 1997 and has worked in many, many departments. He was also a professor of economics at the Business School of Washington University in St. Louis. He has a master’s degree in Brussels and a PhD from U of Pennsylvania.

And the other presenter, one of the three co-authors of this book is Philip

Gerson who is now the Deputy Director of the IMF Fiscal Affairs Department. He previously has a very distinguished and long career at the

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fund. He started in 1993 as an adjunct professional in the EP program as many of us start our life after graduating. He got a PhD from John Hopkins where he went to the IMF and has a very distinguished career that now has one of the leaders of the Fiscal Affairs Department. So without further ado, I will leave them to present the book. Thank you very much.

Abdelhak Senhadji: Thank you very much, José for the introduction and thank you to Adam

for hosting this event. Post-Crisis Fiscal Policy is the first IMF book entirely devoted to fiscal policy and the global crisis. It underscores the evolution of our thinking about fiscal policy and has refocused our attention on fiscal sustainability issues. I should perhaps, at the outset, give the usual disclaimer, which is the views expressed in the book are the authors’ alone. However, the book did benefit quite substantively from the IMF’s unique vantage point. So Phil and I have been given the difficult task to present an overview of this 21-chapter, 600-page book in about 15, 20 minutes. So we will try to be brief and we will be talking fast.

So the book is divided in four parts. The first part is devoted to the

analytical framework that underpins most of the analysis in the book, which is followed by detailed account of the buildup of vulnerabilities prior to the crisis in part two. Part three presents the policy response during the crisis and then part four highlights the fiscal challenges lying ahead and concludes with some policy lessons that Phil will be presenting.

So let me perhaps go very quickly through the key issues that are covered

in each of the four parts. As I mentioned for part one, it provides the analytical underpinning of the book. In particular, it provides an intuitive framework of rollover risk, a key risk going forward for many economies particularly advanced economies.

It also presents analytical insights into the challenge of bringing debt

levels to more sustainable levels by looking at two particular relationships that play a significant and important role in the book. The first one is the component of the debt dynamic equation. For instance, the famous R minus G which is the difference between the interest rate on public debt and the growth rate of the economy. And the other factor of course, the [inaudible 00:05:16] of the debt dynamic equation is the primary balance.

So we look at the determinants of those two important factors that

determine the dynamic equation for debt. We also look at the relationship between debt over GDP ratio and growth and the idea here is to look at—to try to assess the extent of the debt overhang on growth. I guess the offshoot from this analysis is that the debt overhand problem and the unfavorable global environment where interest rates are likely to increase and also growth to remain relatively subdued. Those factors would

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conspire to make fiscal consolidation quite difficult. Another issue that is more recent which is deflationary pressures particularly in Europe if they were to intensify would of course also hamper fiscal consolidation.

So quickly part two reviews the buildup of vulnerabilities and highlight

significant differences in pre-crisis fiscal positions in advanced economies, emerging market and low income countries. It documents the slow buildup of vulnerabilities in advanced economies and in particular it identifies the roots of the problem in the rural area. Both macroeconomic, highlighting both macroeconomic weaknesses as well as structural weaknesses and also shows that tax policy may have contributed to the crisis by encouraging leverage and risk taking.

Emerging markets and low income countries were in relatively better

position in the period leading to the crisis. In emerging markets, the main reason is perhaps that the markets have been—that they were subject to much more market discipline than other countries which led them [inaudible 00:07:15] to some important reforms and as well as strengthening of their fiscal position.

Low income countries also end up with a stronger fiscal position before

the crisis thanks to stronger growth underpinned by some reforms but also from commodities prices which were relatively favorable. Of course that really helped as well.

This part also tried to put the current crisis in historical perspective by

looking at episodes of debt accumulation and their subsequent reduction looking at very long span of data, more than 100 years for several countries and the emphasis is to look at whether the factors that underpinned successful fiscal consolidation episodes are operative in the current context.

Part three provides an in depth analysis of the timing, size, and

composition of the fiscal stimulus and also discusses issues related to its implementation. The book also looks at the nature of the public support to the financial system. Compared to previous crisis episodes, the authorities seem to have opted this time around to a policy of containment through provision of central bank liquidity and guarantees of banks’ liabilities rather than restructuring bank’s asset. This policy may have actually postponed the real cost of the crisis and also may have delayed the recovery.

Another issue that is covered in this part is the fiscal challenges at the

subnational government level using disaggregated data for eight emerging and advanced economies and what the data shows is that many of the subnational governments have been hit by double whammy. A sharp

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decline in own revenues due for example to a decline in taxes from real estate but also a decline in transfers from the central government after initial increase due to the fiscal stimulus. Some of that decline in revenue is likely to be permanent and therefore subnational government will of course have to adjust spending accordingly.

The great recession revived the debate surrounding the size of fiscal

multipliers. There is increasing new evidence showing that fiscal multipliers tend to be asymmetric over the business cycle that is multipliers tend to be higher during period of recession particularly if the recession is severe and also if monetary policies are cumulative.

These findings have important implication for fiscal adjustment plans. In

particular, they suggest that if the country can afford it, on others if markets allow it, they should opt for more gradual adjustment plan rather frontloaded one.

Finally part four covers the fiscal outlook and risk and highlights both

short-term and long-term fiscal challenges and risk to fiscal sustainability. The crisis has left many countries particularly advanced economies with a legacy of high debt. In 2014, we have just reached stabilization; the fiscal consolidation that has been ongoing for a while has just stabilized that so there is quite a bit to be done to put debt ratios on a downward path.

The dynamics look slightly better in emerging markets but they are

predicated at least in the scenarios that we have run on a relatively positive global environment one in which interest rates are likely to remain low, certainly lower than the precrisis level and also that growth although subdued will continue to strengthen over time.

So risk to both advanced and emerging market is apparent and they

include of course policy implementation risk, worsening of the macroeconomic environment and also adjustment fatigue particularly in advanced economies.

So the path for escaping high debt is quite narrow and is likely to be a

lengthy one and there are unfortunately no shortcuts. In the past, governments have used financial repression to reduce debt. In the current context of globalized financial market, it’s very difficult to achieve a captive investor base to have any meaningful gains from financial repression.

Debt restructuring is also an option. However, in some circumstances, it

may be unavoidable but it has its own cost particularly if the investor base is mainly domestic. So I guess this leaves us with one option and one option only in terms of reducing debt which is a fiscal consolidation and

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of course accompanied by structural reform to boost growth which plays a critical role in bringing debt level to a sustainable level.

Central banks can of course help by running a monetary policy that is

relatively accommodative if possible and also ensuring that financial stability and credit channels are working appropriately. Then the book asks what institutional reforms are necessary to help achieve the required fiscal achievement and here, there have been quite a few innovations. I will cite a few.

One is that there is new fiscal rules that are designed to respond to the

business cycle. In particular by allowing for instance automatic stabilizers to operate during period of recession. This new feature by the way now embedded in the European compact. There is also a growing number of independent fiscal councils which are aimed to enhance fiscal accountability and transparency and ultimately distill more fiscal discipline.

These new institutions have been backed by public financial management

reforms particularly reforms that try to strengthen the fiscal framework and also giving it a more medium term orientation. However, these reforms obviously are no panacea. At the end, the authority’s ownership, the government ownership of these reforms remains key for success.

So beyond the adjustment plans that have been put in place now for a few

years, many countries still need to put in place reforms to reign in the spending related to healthcare and pensions. In fact, a recent study by the IMF shows projections over the next two decades that spending on health care and pensions is likely to increase by 3.5 percentage points of GDP in advanced economies and about two percentage points in emerging market. If that were to happen, that would of course weaken significantly the fiscal position, which is already quite weak.

So I think I will stop here given that we are running out of time and I will

turn the floor over to Phil to conclude with some policy lessons. Thank you.

Philip Gerson: Thanks very much. As a number of speakers have already noted, this is a

very long book clocking in at close to 600 pages so I hope there are lots and lots of lessons from it. I’m not going try to cover all of them. I’m going to focus on a few key ones and I should also say that the crisis is still having an effect on economies around the world and we’re still I hope learning from it.

So the list of lessons I’m about to give, first of all, I don’t intend for it to

be a comprehensive list and it’s not the last word by any means. I think

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we’re continuing to grow. We’ll still get new lessons, our understanding of the lessons that we draw already may be affected by future developments. But I did at least want to tie together the many chapters in the book and try to get some lessons for fiscal policymakers going forward.

So let me begin with that and the first lesson, which now seems obvious

but was not obvious before the crisis is that even advanced economies can have debt crisis. Prior to the crisis, there was a lot of discussion about safe debt levels for emerging market economies and there was a feeling that debt ratios above 40 or 50% of GDP might leave countries prone to risks. But there wasn’t a similar number for advanced economies. There was a lot of work that acknowledged that high debt ratios in advanced economies would raise interest rates and were bad for growth but they didn’t have—people didn’t draw the implication from that that there was a risk of a fiscal crisis as a result of high debt levels.

So one of the lessons from the crisis that perhaps the most obvious lesson

from the crisis is that even advanced economies can have a debt crisis that there is for advanced economies a debt ratio at which point markets begin to doubt the sustainability of fiscal policy. We don’t yet have a consensus on what that level is. You look at countries like the US and Japan that have managed to hum along quite nicely with debt ratios around 100% of GDP or more while other advanced economies have gotten into trouble with much lower ratios.

But I think one lesson that does come from the crisis is that even advanced

economies can reach a point where debt is so high that markets begin to doubt the sustainability of fiscal policy and the fiscal crisis ensues.

The second lesson that comes from the crisis is that advanced economies

did not do as good a job as they probably should have in saving during good times. There are I think two reasons for this. One is the standard sort of human nature of political economy argument that it’s hard to save money. It’s hard to cut spending or keep spending down. It’s hard to avoid cutting taxes when money is plentiful.

So you have this tendency in democracies that the deficits that countries

run during bad times aren’t offset by surpluses during good times. And that argument is well understood but I think there’s a second argument too, which is that many advanced economies didn’t perceive how good the good times were when they were good. In many advanced economies, fiscal positions were inflated by high asset prices, by the strength of particular sectors in the economy that may have been especially tax rich like the financial sector and there wasn’t a good technique, the techniques

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that macroeconomists and fiscal economists tend to use to count for the effects of the cycle didn’t capture those very well.

And so policymakers may have entered the crisis with a sense that fiscal

policy was much stronger than it actually was and indeed, a lot of the work that’s being done now in the fiscal affairs department in the IMF and elsewhere is to try to take better account of those cyclical factors to give policymakers a better sense of what’s actually going on in the underlying fiscal accounts so that they have a better sense of what will happen when the bubble finally bursts.

A third lesson that comes which is related to that first lesson is that

sometimes no buffer is big enough. There were some advanced economies—I think of Ireland in particular—that entered the crisis with what seemed like very low levels of debt but nevertheless ran into crisis. There had in the past been some effort to take into account the effect of explicit government guarantees on the fiscal position but the implicit liabilities that come from a financial sector that’s too big to fail weren’t really looked at very rigorously.

So one of the lessons that comes through from the fiscal crisis is that we

need to take much better account of the implicit fiscal liabilities that are out there while larger buffers were always better, right? It’s always better to have a bigger buffer before the crisis to offset what might happen.

There are some countries where the financial sector is so big that it’s

probably not plausible to think that a government could set aside a nest egg big enough to cover a crisis. Again in a country like Ireland where the financial sector is many multiples of GDP, it’s just not plausible that a country could set aside a fiscal buffer for a rainy day in the event of a financial sector shock.

So one lesson that comes from that too is that better macro prudential

policy, better financial sector regulation is an outshoot of fiscal policy as well. At the same time given that financial sector policies can minimize risk but can’t eliminate them is an open question whether or not some advanced economies may want to think about setting an upper limit on the size of their financial sector as a way to protect themselves from the fiscal risks that would come from a shock.

There are several other lessons that come through from the book. I’m

going to move through very quickly because as Abdelhak mentioned, we’re running short on time and we do want to leave time for the panel so I’ll go through them very quickly.

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One lesson is that growth is the spoonful of sugar that can help bring down debt ratios more quickly over time and the impact comes from two things. It comes from denominator effect because obviously the higher is GPD, the lower is the debt-to-GDP ratio and it comes from a numerator effect because as work in the IMF has shown, countries that grow faster tend to run larger primary surpluses over time.

So the sort of standard measures that we think about to promote growth,

reforms to the labor market, reforms to the retail sector, reforms to the financial sector to promote growth of credit, these are all things that can help bring down the debt ratio over time and so we need to think about those as being offshoots of fiscal policy as well. That just as important as the growth rate or the debt ratio is the interest rate that economies face. Abdelhak spoke about that relationship between R minus G and so it’s important that countries do a good job of setting out their fiscal policy objectives, making sure that markets understand what it is that they’re trying to do and keeping that medium term path to ensure that they don’t lose market confidence.

The budget institutions matter and that in many advanced economies,

they’re not as good as they should be. Many countries lack a sufficient medium-term focus on budgeting. They lack in independent fiscal institute that could provide confidence about the realism of assumptions and that they lack adequate fiscal data. In many countries, data come late and are subject to large revision.

And so in many advanced economies, there’s a need to strengthen

institutions to make sure that people have a better idea what’s actually going on with fiscal accounts. That monetary integration means fiscal integration too, that if you have monetary integration, you need a sufficient degree of fiscal integration to guard against the impact not just of idiosyncratic shocks but also of idiosyncratic policies that when it comes to fiscal policy, the recipe is likely to be as it almost always is, a little bit of this and a little bit of that some measures on the revenue side and some measures on the expenditure side.

The exact recipe of course is going to depend on country characteristics

but in general, the higher the revenue ratio, the more countries need to rely on the expenditure side, the higher is spending, the more countries need to rely on the revenue side.

But the final point that I want to make is that as with Mark Twain, the

rumors of fiscal policy’s death were greatly exaggerated. There was a feeling before the crisis that monetary policy was the primary short run stabilization tool and that the objectives of fiscal policy were primarily medium and longer run in orientation and what the crisis has shown is that

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there are circumstances where fiscal policy can play an important short-term stabilization role.

This reflects to some extent the unique circumstances of the crisis with

many countries already at or near the zero lower bound. There was very little room for fiscal policy to play a countercyclical role and so they had to turn to fiscal policy. But at the same time, work that has been done in the IMF and in the fiscal affairs department—it’s reported in this book—shows that the particular circumstances that we found ourselves in at the crisis with interest rates very low, with a large output gap and with a financial sector that was not operating properly because of the crisis that fiscal policy could be especially effective under those circumstances.

Now I don’t think we would argue that going forward, fiscal policy should

become the primary tool for short run stabilization and replace monetary policy and I think it’s clear once interest rates return to a more normal level, to a level closer to their medium and historical norms that monetary policy is going to have to pick back up the mantle of a short run stabilization tool.

But at the same time, I think the experience of the crisis has shown us that

under certain circumstances and circumstances that exist not just in the footnote to an intermediate textbook but in the real world that we all inhabit that there is on occasion a role for fiscal policy to play a countercyclical role. So with that, let me wrap up this portion of the program and turn it over to the panel. Thank you very much.

José De Gregorio: Thanks for the presentation and now we’d have our panel and I invite the

participants of the panel. We have a very interesting panel so I’ll be extremely brief. They will discuss the book and the challenges of fiscal policy for six minutes, about six minutes and then we’ll go for Q&A and they will wrap up and answer.

We have Carlo Cottarelli who is one of the coauthors but is no longer in

the Fund so they didn’t want to invite him to talk, I think. He’s the Commissioner of Public Spending Reform. You could say, "Well, that’s an easy job." But he’s in Italy so that makes it a very difficult. He was the director of the fiscal affairs department from November 2008 to ‘13 and he had a very distinguished career since 1988 at the IMF. And before, he was at the Bank of Italy so he was at the midst of the IMF discussions during the crisis.

Then we have Vítor Gaspar who is the new director of the IMF’s fiscal

affairs department since June this year. Now, I think that the most impressive thing that he has done, he was Minister of Finance of Portugal from 2011 to 2013. I don’t need to remind you what happened in Portugal

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those years so he was not just courageous but was a very successful finance minister and now we hope he’ll have the same success at the fund.

We have then Maya MacGuineas who’s very well known for all of us

especially for those of you that live here, you know. She’s a regular contributor to issues like health, economy, tax, budget, policy, one of the most influential persons in fiscal policy here in Washington.

And finally, we’ll have Adam Posen who is the president of the Peterson

Institute. Being a fellow at the Institute, I cannot say it’s not [inaudible 00:25:49] like I say that is a world leading independent thinktank on seconomic [inaudible 00:25:52]. I believe it but I should say it. So and Adam is of course a great economist and also policymaker. During the crisis, he was an external member of the Bank of England Monetary Policy Setting Committee. So he has also a broad experience not only in the economic side but also on the policy side and also during the crisis, he was in the middle of one of the most important places running monetary policy.

So now, we’ll start with Carlo and we’ll give them some minutes and to

talk to discuss this. You can pick wherever you prefer to talk. Carlo Cottarelli: Okay, my thanks first of all to the Peterson Institute, to Adam for hosting,

to José for his nice words of introduction. This book was written during the last year when I was heading the Fiscal Affairs Department of the IMF. As José mentioned since October 23rd, 2013, I’ve taken up the position of Commissioner for Public Spending Reform in Italy which is likely a more challenging job than the one I had before I think. But it’s tough to cut public spending in all countries but perhaps again as José was noting, it’s perhaps a bit tougher in Italy.

As you know, a heated debate is going in Europe at the moment and in the

world about the extent to which concerns about low growth should be considered as more important than concerns about fiscal discipline. This debate if you can call it the austerity debate has been going on for quite a while and it’s very much at the heart of the book that has been presented, is being presented today.

In Europe, [inaudible 00:27:59] debate of the austerity. The austerity

debate is taking a particular connotation in terms of flexibility debate, how much the European rules, the rules under the fiscal compact, the stability and growth pact should become more flexible to take into account the need for growth.

There is clearly a need to reconcile this need for growth and the need for

fiscal stability and the point that I will make today is there’s quite a lot

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that you can do to reconcile the need for flexibility and the need for fiscal policy that supports growth without really changing the existing rules but simply by interpreting the rule in a more—in a smarter way than what is happening now.

I’ll talk about pretty technical points also but these details, technical

details, but these details are important. The first point indeed I want to make relates to one way which the stability and growth pact and the fiscal compact try to reconcile the need for fiscal discipline with the need for flexibility. And one key way which the stability and growth pact tries to do this is by focusing the policymaking and the policymakers on improvements in the so called structural balance of the fiscal accounts that these—the balance adjusted for cyclical effect. So you don’t target a headline improvement in the deficit; you target a structural improvement in the deficit.

So this is important because if the economy is hit by a shock, USA should

have allowed to let the automatic stabilizers operate and therefore you let the fiscal policy to play a supportive role without removing the trend, the improvement in the fiscal account which is related to structure, debt improvement in the structure deficit.

This approach is fine and we have been arguing at the Fund that targeting

structural deficit, improvement of structural deficit is critical but given the way the European Union and others compute potential growth and from this day derived as structural deficit, given the way we compute the effect of the cyclical position of the economy on the fiscal account, given this way, there are some problems in this approach.

This approach is good for regular recession, for regular business cycles in

which the economy grows for one or two years then you have a recession, the growth rate declines but is not working well for long recession, the long kind of recessions. Europe has been affected, been [inaudible 00:31:39] to since the 2007 crisis.

The reason is that in practice no matter how sophisticated the underlying

statistical model are, potential growth is strongly influenced by backward looking observation about actual growth. Therefore potential growth appears to be particularly low in many European countries now. I think it is estimated to be close to zero in Italy. So potential growth for Italy now is regarded by the commission as zero. I think the actual number for 2013 was slightly negative, minus 0.1% and this implies that if a country like Italy which has zero potential growth has an even modest recovery; this is regarded to be a booming economy.

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So for example if next year Italy were projected to grow by—I’ll speak a bit longer than one minute, if Italy is projected to grow by say 1.3%, 1.4% against the potential growth of zero, this is seen as a booming economy and therefore this calls for a very strong fiscal adjustment in terms of headline balances.

I think one can easily compute that given the relationship between growth

and the deficit and given the relationship and given the structural improvement, improving the structural deficit that a country like Italy is supposed to have, if growth next year in Italy were 1.3%, 1.4% in Italy or any other country in this situation, the improvement in the nominal balance would have to be in the order of 1, 1.5% which taking into account even modest multipliers would have significant effects on growth therefore this will not materialize.

So I think there is—this problem needs to be looked at very closely and it

can be done without any major change in the stability and growth pact, without any major change in the fiscal compact. It’s a technical issue but these technical issues are very important.

I know I don’t have much time but I want to make one last point. One way

of taking into account the potential growth should not be based only on backward looking information. It’s by considering that structural reforms. The structural reforms will want—the structural reforms that we’re pushing for have an impact in the data in the way we compute these things on potential growth.

So there is a need I think of taking into account as long as you define in a

clear way the structural reforms that you want to implement, there is a need of incorporating your estimates of potential growth therefore that you are undertaking and this is not done at the moment. I think this is very important to be done in the future to avoid this very strange situation which a country undertakes structural reforms, comes from a period of various low growth and is penalized for as long as one shows that these reforms are having an effect on the economy and the economy is expected to growth because the current approach is to mistake what is recovering, potential growth with a cyclical recovery of the economy which will call for a strong fiscal adjustment.

I will stop at this point. I’ve taken too much of my time. Thank you for

your attention. José De Gregorio: Thank you very much, Vítor. Vítor Gaspar: So I want to start by thanking the Peterson Institute and Adam Posen for

putting together this session, José for his kind words of introduction and

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especially the editors and authors of the book for putting together a book which is definitely a very important contribution to the literature on fiscal policy.

The book brings together an impressive compilation of 21 papers by 45

authors with a multifaceted view on fiscal policy in the global crisis. The book’s coverage is impressive ranging from the conduct of fiscal policy before 2007 to the challenges ahead and lessons learned. It is, and I repeat, a major contribution to the literature on fiscal policy.

I will now argue that the issues covered in the book are going to be of

lasting relevance. Fiscal policy is in my view going to be at the center of micro and macro policymaking for a long time. But since I’m supposed to be short, I will limit myself to a few remarks.

FAD is conducting research on fiscal adjustment episodes. The research

by Julio Escolano and co-authors covers 91 consolidation episodes selected from the period from 1945 until 2012 and covers 30 advanced economies and 60 developing economies. Adjustment episodes are identified by the authors based on two criteria: first, the need for adjustment; second, the willingness by the authorities to carry out the required policy actions.

They find that corrections in the cyclically adjusted primary balance are

sizeable. They are also lasting. They suffice to stabilize the public debt to GDP ratios but not to reduce them. On average, for the 91 episodes of adjustment covered, by this sample, the public debt to GDP ratio stabilized about 15 percentage points of GDP above precrisis levels, prefiscal crisis levels.

Interestingly, the available information on fiscal policy action points to the

present danger of a repeat of adjustment fatigue. This point is all the more important because in the decades, previous to the global crisis, there was a great public debt accumulation in advanced economies. More specifically, Abdelhak and co-authors in chapter seven of the book document that the weighted average increase in the period from 1970 to 2007, the debt during this period accumulated 45% of GDP and that the increase was gradual and enduring. Abdelhak had this reported in his presentation of the book.

It is also worthwhile to look at the comparison between advanced and

developing economies. From 2001 to 2013, the average debt to GDP ratio in advanced economies increased from 71.6% of GDP to 106.5%. During the same period, the relevant ratios of developing economies declined from 47.4 to 33.7. Given that the book quotes that the risk for public debt

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sustainability in developing economies was believed to be in the range from 40 to 50%, these trends are remarkable.

In the book as Philip has said, the first lesson is that no country advanced

or developing can defy the law of gravity that is no country can safely ignore debt sustainability limits. Now these global trends are also important when one looks at GDP shares in world economy. During the period that I’ve noted, the shares of world GDP in developing and advanced economies have inverted. For advanced economies, they moved from 58 to 42—sorry, they were 58 and 42% respectively in 2001 and they inverted in 2013 with 44% for advanced economies and 56% for developing economies. The global landscape is definitely changing.

One important and crucial driving force is population of demographics.

Fertility rates have been declining and are now below the 2.1 replacement ratio in most advanced economies. Life expectancy is increasing. Declining population and aging with have far-reaching consequences. Debt levels unprecedented in peace time meet expenditure pressures on pensions and health.

At the same time, the book also documents that fiscal policy will be called

on to contribute to macroeconomic stability and as appropriate, stabilization. As for FAD, work is progressing on how to conduct fiscal policy in the aftermath of the global crisis. Long-term drivers like population, technology and natural resources feature prominently in ongoing research.

After the crisis, the magnitude of the challenges and the quality of the

contributions to this book ensure that the book will stay at the center of the literature on fiscal policy for many years to come. Thank you.

José De Gregorio: Thanks very much, Vítor. And now we have Maya, please. Maya MacGuineas: Good, thank you. It’s very nice to be here this afternoon. I said this to

Adam right before the lunch but I always think that the Peterson Institute actually does the single best job of thinktanks in this town hands down of having the best audience. And so I’m really excited to sort of the discussion...

Adam Posen: Can I quote the first half of your sentence? And I’ll quote it all but I really

like the first half, sorry. Maya MacGuineas: No, I think the discussions that go on here are tremendous. So I’m excited

to be here and congratulations to the authors and co-authors of this book. As somebody who works on fiscal policy in the US, I’ve found the past years discouraging for a number of reasons but one of them has been that

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the discussion has been so focused sort of on the policy problems but it quickly- or moves to the degenerating situation of politics in the US.

And the fiscal discussion in the US is really focused on how the political

process no longer works. Many of the policies and solutions are sort of well-known and the question is how to get them done. So I found it really useful, exciting and it kind of reminded why I like fiscal policy so much to work through this book which is really a great pulling together of observations from where we were before contributions sort of new, new contributions to the literature which really is in many ways sort of filled the best through the work of the IMF but still needs so much more work and some very sensible policy solutions that seem to apply to a number of countries including the US.

I’ll talk just briefly. I’ll use my few minutes just to talk about the situation

in the US and link it to some of the observations from the book and what it prompted me to think about. I think the situation in the US is really interesting because in many ways right now, we’re suffering from deficit fatigue where the kind of political narrative is that the situation has been resolved as the deficit comes down and of course that’s far from reality. The debt projections are what always has been the troubling part. It hasn’t been an annual deficit that people should be concerned about. It’s the projections of the debt and they remain unsustainable.

And because so much of our ability to do policy is linked to where we are

in the political cycle, this year being the midterm elections, it was kind of taken as a given that we would make no improvement but I think one thing that really wasn’t realized was just how much damage could actually get done this year and in our office, the kind of driving principle for the year was do no harm and with every policy that comes up, we sort of feel like we’ve lost another battle and what’s happening here is that you have all sorts of policies from unemployment, insurance or fixing the sustainable growth rate, the doc fix, but one of the health care changes that gets made every year to new veterans benefits to tax extenders, all sorts of policies that are still being deficit financed.

And I think because they tend to seem somewhat smaller, manageable at

the time, most people haven’t stopped and realized that what the US is looking at in terms of new policies from kind of the first six months of the year alone would basically add another $2.3 trillion to the debt over the next decade which is very significant. It’s about how much progress has been made recently that would increase the overall debt at the end of the decade by over eight percentage points of GDP.

So it looks like we’re managing to do a good bit of harm and it’s all

frustrating because it’s so well-known and the IMF and others lay out

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what’s necessary, what we need which is a medium-term consolidation plan. The US is very lucky. We have the luxury of continuing to be the safe haven for some reason which allows us to do this on a gradual timetable and yet the policies that we’ve done so far are in many ways backwards. Again sort of the progress on the deficit is a supposed result of an improving economy but also some policy changes.

But I would argue that they were the absolute reverse of what should have

happened on the revenue side and I sort of take it as a given that the medium term consolidation plan we need would include both revenues and spending. But on the revenue side, we increased tax rates in this country when clearly there’s such an opportunity for tax reform that could be pro-growth, simplify the tax code, help with competitiveness and raise revenues and we went from increasing rates instead and there’s a real pushback on reducing rates as part of fundamental tax reform even if you kept the tax burdens the same, I think for more political reasons than economic reasons.

And then on the spending side, clearly we’ve had this just absurd

politically driven policy sequester which was the mechanism that was put in place. We’ve talked--the IMF has talked a lot about fiscal triggers. The sequester was meant to be one of those triggers that was so stupid you would never let it hit and then here we are because the political system is such that nobody wanted to make choices to replace it. We let it hit, you know, we put a little breathing room in the change at the end of last year but still the sequester is in place.

Meanwhile, we’ve done nothing to deal with the aging problems. We are

making it look like some progress in controlling health care costs but honestly don’t really know how much those are permanent sustainable changes. There’s still a whole lot more to be done.

So it’s pretty frustrating. I think when you look at changes that in some

way make you feel that the problem is not as large or many people in the public think the problem is not as large as it is and many of those changes have probably done some real damage to the economy in the short term, too much consolidation quickly and not the kind of changes that will grow over time.

I also think that the US could learn a lot from a lot of other countries that

do much better transparency in their fiscal situation. One of the things that we’ve seen is that fiscal consolidation plans that work and stay on track tend to do so when the public understands what’s going on and can hold government officials accountable.

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The US has an incredibly nontransparent budgeting system and we ran a commission a couple years ago that basically came up with what we call the three Ts but the need to increase on the budget front, budget transparency, coupled with the need to have fiscal targets which is something we don’t have in the US and fiscal triggers, something that would automatically make changes when we’re off course. There has not been much improvement on any of those fronts yet.

So then just kind of switching to some of the book’s recommendations and

how you link them to the US, I think one of the things that’s really interesting how so many of the countries suffer from the exact same challenges but the lack of progress we’ve made on dealing with aging, the fact that we’re going to be so harmed by the growing interest cost. I mean, interest is the single fastest growing part of the budget right now and that’s in a low rate environment so we’re incredibly vulnerable to changes in that.

And in the US still the lack of political will even responding to kind of the

clear-cut paths. We had the Simpson-Bowles Commission here in the US that laid out the kind of path that would put us on the right track but the inability to work with those.

So finally just quickly, so many good recommendations in this book. I do

think that the focus on fiscal consolidation with structural changes that will promote growth is the key to this whole thing. In many ways, it often kind of falls in a camp here where it’s excessive consolidation or austerity or focusing on short-term deficit reduction or kind of the pie in the sky. We can grow our way out of the problem when clearly you have a need for the medium-term plan coupled with the real changes that will help promote growth and both of them are going to be necessary to tackle this challenge.

I think on the recommendation or the acknowledgement that we need to do

much more with aging, I’m incredibly worried about where the US stands on that. If you look at the political promises that come out from the government sort of the single most widespread and strong promise out there is that whenever people start to talk about policy changes to our entitlements, healthcare and retirement systems and then they quickly back away, but when they do, the one promise they make is not to touch anybody over 55 and that promise has been in place for over ten years now but that number is not changing.

So we have the baby boom moving into retirement. We’re not looking at

any of the promises that could be things that you know promise to come up with policies that help promote growth or protect people who depend on programs. It’s all about protecting people who are over 55. So the

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policies that will most help us be more flexible and work with an aging population and [inaudible 00:50:05] bump up against the political realities.

And finally, I’ve always really been drawn to a lot of the

recommendations about changes in fiscal councils. In one way, the US does such great work on this because our institution, the Congressional Budget Office is a great model. It is a model that is used around the world but you sometimes kind of want to figure out how you could free up CBO so that they could actually have some more opinions because I always think that CBO knows a lot of the answers. They know what to do and is there a way to build a council that is used kind of as a credible source that makes recommendations so fiscal policy isn’t as politicized.

The challenge there of course is that once you give that power to

independent counsel beyond just analysis but to have opinions, they lose their credibility because one side or both sides usually is always whining that they are picking the other side. So I think the real challenge is how in a time when there’s no political will to make the kinds of changes that need to happen, you could have an impartial body be able to push, nudge policymakers in the right direction.

So I’ll finish there but again, I think my biggest takeaway from these

overall recommendations and concern at the same time is how important it is to think about policies that both focus on fiscal consolidation and structural reforms that promote growth whereas in the US, we — one do very little to focus on the long term. Like if you look at how we look at our budget, there’s very little recognition or acknowledgement of when you put a policy in place. What will those changes look like five years from now, ten years from now and even in the second decade. So I think that’s an area that’s important to build out how we can focus on the long term.

And in the US, I think there’s a real risk that what we do is we muddle

along. We make changes that are just big enough and if the past is any indication perhaps that are on the easiest part of the budget but not the best part of the budgets but just big enough so that we don’t have like the real risk of a fiscal crisis but they’re not smart, they don’t help the economy grow more, the fiscal situation doesn’t improve as much as it should and we kind of get stuck there way below the potential of what we could be.

José De Gregorio: Okay, thank you very much. Now we have Adam Posen. Adam Posen: I will try to set an example of brevity, not that my colleagues here didn’t

but various [inaudible 00:52:14] people on this stage in other occasions, I’ll try to live up to it. But thank you to José for stepping in and adding a distinguished senior perspective on this. And we’re very grateful to the

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IMF and to Carlo and particularly to Phil and to Abdel who came to us and said we could have this kind of substantive roll out and kind of challenging discussion here and we’re very proud to give the IMF that forum and to give this critical bridge which Maya has made for us as I hoped she would to the US debate as well. So I think this is really terrific and true congratulations to Abdel and Phil for assembling an amazing piece of work.

I want to also welcome my friend Vítor Gaspar back to Washington and I

think coming on the heels of this project I think is a great example because there was probably no issue that was as fraught for the IMF to reconsider as the fiscal policy religion that it had promulgated and to a degree excessively proselytized for a very long time and for the Fund to in real time or as close to real time as you could get be dealing with issues, be dealing with evidence, reopening questions and doing so in an intellectually honest way I think is praise-worthy and I think it actually gives the Fiscal Affairs Department more credibility now than when it was the knee-jerk it’s mostly fiscal stereotype it used to be and I’m sure there are people in this room who will say things weren’t that bad and I recognize that but I think it is worthy of us all noting the initiatives under Carlo, under everybody that the Fund took and the Fiscal Affairs Department took particularly on the issues of multipliers, on the issues of short-term tradeoffs, on re-establishing a credible framework for thinking about sustainability rather than simple triggers. All of these were significant intellectually honest and important progress for them to make, which only adds to the credibility of the remaining advice that they are giving. So kudos to you guys for doing that.

I think one of the things that is underappreciated even from today’s

presentations that came out in some of Phil’s opening presentation is that we have to think a lot more about the financial system fiscal policy link. There’s been a lot of chatter in recent years about rethinking the monetary financial system link but I think the fiscal financial system link is very important and it runs in multiple directions.

As was mentioned, tax policy on leverage and on debt played a key role in

building the imbalances of the crisis. Public support for the financial system as was seen in be it Ireland or Iceland or the UK or Spain plays a material difference in how you end up in these debt situations. I think we talk a lot rightly as Maya and others have pointed out about aging and demographics but I think we have been too long ignoring and downplaying the financial aspects of too big to fail of having very large financial systems in your countries and I think that’s in there but I would commend the Fund for raising this or not the Fund, the authors I should say and I would emphasize that more actually than it’s currently been done.

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I also think the initial part one is the sort of analytical framework. It starts

with Carlo and co-authors’ chapters on sustainability and we released last week a new book by Bill Cline on the Euro debt crisis which does a similar I think constructive thing. Both of them are trying to think, "Okay, let’s be a little more realistic about the co-movements of growth and debt. Let’s not just make it a short-term thing. Let’s not just ignore that. Let’s look at how these may vary together in not trivial ways,” which I think is incredibly important.

Third, I think and Vítor of course has unique capability to talk about this

but we’re kind of hoping Carlo manages to get to talk about this and that is capacity for austerity. I think for all the talk and I’ve been on this debate about you’re not wanting to overdo austerity in part because of the previous point, the issues of spillovers, the asymmetries of multipliers, the problems when everybody’s contracting at once, I think it is reasonable to say that the democracy gets to rule.

And if there is a sufficient coalition for austerity, who am I to say don’t do

it? And as my colleagues Jacob Kirkegaard and Anders Aslund and this building have repeatedly pointed out and Vítor lived, it is surprising looking at the European crisis how much political will and sustainable support there’s been for austerity and I think we have to acknowledge that and take that into account when we think about planning going forward.

I was a little surprised it was thrown up there in one of the initial slides

saying financial repression is not an option. It may not be an option that the fiscal affairs department wants to talk about encourage but I think we have to realistically when you look at Japan or you look at Italy or you look at a host of countries through the last decades that various forms of financial repression have mattered and since repeated something I say regularly, one person’s financial repression is another person’s prudential supervision. It’s not entirely necessarily an object you want to ignore so I would put that in the mix.

So all that is great and I mean it very sincerely. I think this is a huge step

forward and in terms of what it represents of our thinking in the world and the Fund is a great step forward. I do want to raise however beyond encouraging more of these financial fiscal links and thinking about those, I want to raise four other issues that I think are not quite where I think we need to be.

The first is we’re still talking and a number of my colleagues’

presentations today are still talking as though there is a sort of debt trigger level. Now I mean, the 90% debt myth has been successfully killed for good reason. I think the closest we came to something sensible on this was

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I think during Abdel’s point that you know there are some advanced economies that could get into trouble at 80% of GDP and there are some advanced economies that go yodido at 120% of GDP and it is debt to GPD, excuse me.

I think it’s inconvenient truth as they say to acknowledge this fact. As Joe

Gagnon here and many others have pointed out, it may have a little bit of something to do with whether or not you have your own currency and it may have a little bit of something to do with whether or not you’re large and those two go together and you know for a Fund with 100 and billion members that may not be a comfortable conditional statement to make but I think it is a bit misleading to start to keep talking as though it’s a conditional statement on the level of GDP, level of debt to GDP which just leads to my second point.

I think, and this is not a criticism in any way of the book but is a fact we

have to all contend with who care about this issue. Financial market discipline really still doesn’t work whether it’s subzones within China or whether it’s subzones within the Euro area, we still have great problems seeing financial markets properly price variations in risk over time and across space. And absent that, that’s when we get into all the things that my colleagues by implication, that’s why we need the fiscal councils and the fiscal authorities and the rules and so on.

But we have to be not yet giving up. We have to think about what is it we

could do to get a more reasonable budget response, excuse me, market response to these budget differences. Some people would argue that for all the faults of the US fiscal system which I completely defer to Maya and happen to agree with about there is an issue that our state and local debt pricing is very important.

Final two points, quickly, I’ve always been a skeptic on the issue of fiscal

rules. I think they’re well-intentioned but I think they reflect politics in any given moment rather than having their own binding force and I think that’s why it’s very fruitful that we talked earlier about automatic stabilizers and I think that that is potentially the most important place we can try to make progress.

Our mutual colleague at the Fund, Olivier Blanchard, many years ago had

a conference here spoke about the idea that automatic stabilizers don’t have to be what we’re given—were not given by God. They’re the accidental accumulation of policy decisions made through the years and I pointed out back in 2005 on the Euro that the automatic stabilizers were a little deficient at that point.

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I think that that’s where we talk about in a sense, we want to do opportunistic budget consolidation and we have to think about slipping in activist rules, activist stabilizers that force and maybe it includes going back to the financial point very aggressive real estate tax that lean against the wind in that situation that also give you revenues. I don’t know, but I think that way as we move forward, I put less faith on the long-term fiscal councils or rules and more faith of building in some of these better stabilizers.

But this is a wonderful debate and discussion to join and again, I sincerely

commend the Fiscal Affairs Department at the Fund for doing such serious work in real time.

José De Gregorio: Okay, thanks, Adam. We have still a little bit of time for a couple of

questions. If you can identify and then we’ll leave to the panel if they want to answer. Please, Teresa. Thank you. The microphone is coming and please identify to know you.

Teresa Ter-Minassian: Former Director of the FAD, predecessor of Carlo. Thank you very

much. This is a very impressive book. I look forward to reading it with great interest. I have a question for Carlo actually. I really sort of enjoyed your point about the importance of you know taking into account structural reforms in testing the compliance with EU fiscal rules but you know very well, I’m sure better than me, how difficult it is to translate this into technically sound measures and how do you assess the effects of the structural reforms on potential growth in a quantified way? I mean, this is particularly important when you have sanctions and both reputation and in the financial, potentially financial sanctions for noncompliance with the rules. Thank you.

José De Gregorio: We’ll accumulate the questions [inaudible 01:03:30]. Randall Henning: Thank you. I’m Randy Henning at American University and I also wanted

to follow-up on Carlo’s comments about the methodology by which the cyclical adjustment is made in the assessment of fiscal policy. This is an important question because of work European authorities will enforce these rules and you’re up under the fiscal compact on the basis of these calculations and as Carlo mentioned, there is a good deal of—there’s a fairly wide range in what we would regard as respectable estimates of the output gap.

So the question is what do we do when important institutions like the

European Commission and the International Monetary Fund disagree on how that calculation should be made? It’s hard to see, well, let me put it this way. When there’s disagreement, it’s quite possible that the authority,

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the moral authority of the European calculations could be undercut by a different position taken by the Fund or the OECD or other institutions.

So the question is what are you doing to anticipate this possibility? And I

ask kind of thinking that on the one hand, we want to encourage cooperation among the institutions but on the other hand, we don’t want to encourage [inaudible 01:05:13] a groupthink.

José De Gregorio: Thank you, we have the last two questions on the back. Mr. Doyle: I’m [inaudible 01:05:19] Doyle and I’m speaking on my own behalf. I

want to join the other too inviting Carlo to add to his already informative comments. Carlo, I wonder if you have an opinion about the proposals the Fund has made recently about automatic sovereign debt restructuring particularly from the perspective of Italy either as a potential feature restructure itself or as collateral damage from such automatic restructuring done elsewhere in the Euro area in the future. In short, are these proposals undesirable, unlikely?

José De Gregorio: Thanks. Patrick: Okay, my name is Patrick [inaudible 01:05:59]. I have one question for the

whole panel. In last year, the IMF [inaudible 01:06:07] very drastically the United Kingdom against any austerity measures. I think the wording was this is some kind of playing with fire and we’re going to gather, maybe we even gather some kind of recession and the IMF last year said due to these announced austerity measures that the growth in UK would be around 0.7 percentage points.

Some weeks ago, Madame Lagarde accepted that the IMF was completely

wrong and that the IMF has completely underestimated the confidence of the austerity measures in the United Kingdom. So I’m just wondering, what do we really know about how austerity is going to work in this timing right after a huge recession and maybe the confidence effect is much bigger than the IMF is willing to accept.

José De Gregorio: Thank you very much. So now all questions were for Carlo but then after

Carlo answers, I will ask the rest of the panel if they want to add something.

Carlo Cottarelli: Okay. Three points, clearly there are difficulties as Teresa suggested the

inner question in linking structural reforms to an estimate, how much potential growth would benefit from these reforms. The point I was making however is twofold. First of all, it’s better to have at least a minimum assessment. Essentially, we now expect structural reform to have zero impact on potential growth at least in this calculation because

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potential growth is simply backward looking. And instead, it is better to have a prudential estimate of the impact of potential growth. Maybe just a quarter, 0.2% of GPD than having zero assuming that it is zero. It just doesn’t make sense to assume.

You use structural reform to boost growth and in a forward-looking—what

you do with potential growth, the only thing you do is to look at how much growth was in the past. That almost by definition is wrong. So we can do better than what we do.

Indeed the second point I wanted to make was indeed that the approach of

this [inaudible 01:08:18] is purely mechanical and that clearly is unsatisfactory and it leads to this paradoxical situation the ten-year recovery is seen as a cyclical recovery other than a return to more normal conditions of potential growth basically acknowledging that there was never such a huge drop in potential growth as it is [inaudible 01:08:43] in these estimates.

On the issue of debt restructuring, the point that the book makes is

essentially one and I don’t want to comment about the specific point that was made by the IMF because I’m not really following the debate. I don’t know enough about how automatic this debt restructure would be so—but the point that the book makes about debt restructuring is that very often debt restructuring is seen as a way of avoiding fiscal adjustment. This is simply wrong.

Debt restructuring is fiscal adjustment. You are taxing somebody. You are

taxing the bondholders. So it’s not true that debt restructuring, "Oh, we’re afraid of fiscal adjustment because this will affect the growth. We do debt restructuring." Debt restructuring is a tax. It may be a tax that falls partly on foreigners but that is true only if foreigners hold your debt. If your debt is held by your residents, then you are taxing your residents. And if debt is held abroad but those who hold debt are just your neighbors, your close neighbors, there are going to be feedback effects from taxing your neighbors. If the banking system of my neighbor gets into trouble, I’m going to have to suffer the consequences of this.

In other words, debt restructuring in Europe is not debt restructuring made

in emerging market countries where the holders of debt are beyond the ocean. You’re taxing your residents and you’re taxing your neighbors and therefore, you’re going to suffer the recessionary effect of these taxes as much as you’re going to suffer from any fiscal adjustment in the short run.

On the UK, obviously it’s not—I was following from far away these

comments that were made by Madame Lagarde about the UK. At the time I was there, the Fiscal Affairs Department did take the view that what the

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UK authorities were doing was not so inappropriate from a fiscal adjustment point of view. Having said this, it’s never easy obviously to calibrate the fiscal advice in a situation in which there is a lot of uncertainty about what growth is expected to do.

I think at the time the IMF was expecting much lower growth than what it

turned out to be in the UK and as a result, the view that was taken at the time with UK was be cautious with fiscal adjustment. Export growth turned out to be higher so I think that was basically the story behind the policy advice that was given in the UK at the time.

José De Gregorio: I don’t know if Vítor, Maya or Adam want to add something. Vítor? Vítor Gaspar: Sure. The question that was asked about the UK had a general formulation

at the end, how can we know about the effects of fiscal policy. Now their issue is obviously a hard one because the effects of fiscal policy depend not only on the connections of fiscal policy directly with the economy but also on the impacts of fiscal policy on the expectations of the private sector.

So clearly at this point in time, at the state of knowledge that we have, one

has always to exercise judgment when looking at policy advice. I will very quickly move to two additional points that have to do with contributions that were made by Adam and by Maya and since they will be speaking after me, that’s fair.

On Adam, one of the issues that Adam very much emphasized in his

comments was the role of automatic stabilizers and I happen to agree that automatic stabilizers and the design of automatic stabilizers is likely to be one of the key topics of research on fiscal policy going forward. I do believe however that automatic stabilizers are part of the characteristics of the fiscal policy regime and therefore are in a broad sense a part of the set of fiscal rules that Adam said it is liked. And so I would very much appreciate a comment from Adam on this point.

On Maya and Adam, in your presentations several times you emphasized

the link between fiscal policy and politics sometimes in general, sometimes in connection with the US situation and do happen to believe that that’s another topic where research is likely to be needed going forward that is being able to understand at a deeper level perhaps even being able to model the interaction between the economic science part of fiscal policy and the political aspects that seem to determine fiscal policy outcome so often.

José De Gregorio: Thanks, Vítor. Maya.

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Maya MacGuineas: Well, boy, I’ll just say those would be two terrific areas for the research for the Fund. I can’t wait to see what you come up with. I don’t really have an in depth comment on the question about the UK. It just made me think more about the fact that not only are projections notoriously hard to get right on fiscal policy because there are so many other factors in terms of where the economy is otherwise what would have happened otherwise. And the other mystery of it all is so much of what you do in fiscal policy is to avoid certain situations down the road so to avoid being somewhere else a decade from now or half a decade from now and one can never know where you would have been otherwise. So I just think it’s a notoriously difficult situation to be in in making those projections.

And then on that point about automatic stabilizers, I actually had the same

thought when Adam was talking that I sort of think activist automatic stabilizers are in many ways the same as fiscal rules and that may be where this merges. So automatic stabilizers that are linked a bit more to certain triggers and you know economic conditions or other things could in fact be the next set of fiscal rules. So perhaps that will be another panel that the Peterson Institute will host at some point.

José De Gregorio: Okay, Adam, you can start the next panel for this thing. Adam Posen: Yeah, just real quick. I mean, obviously we will be delighted to have Vítor

and Maya and Carlo if we still can afford airfare come back at any time to pursue this and next time, we’ll let José talk instead of me. Just two points quickly.

On the rules versus stabilizers, I mean, this gets into metaphilosophical

issues but I just take the rules as the kind of ridiculous things where the US government would say, "We’re going to have Gramm-Rudman-Hollings or we’re going to have—or the Stability and Growth Pact" which failed in early 2000s immediately after the Euro. "Oh, we’re going to make sure nobody runs a deficit over some number." Those kinds of rules.

I think rules that are backed by actual—they’re embodied I should say in

actual programs or institutions like a form of tax that is very highly cyclical say, that I’m more comfortable with and if you want to label that a rule, okay. By rule, I meant more the person wagging their finger with a clear outcome target.

On the UK, with all due respect to the gentleman from the [inaudible

01:17:07], I think my colleagues for obvious reasons are being a little too courteous. The decision of Managing Director Lagarde to make that intervention in the midst of a European political campaign was above all our pay grade but was clearly a decision of that ilk and not based on the evidence and it’s a little too cute to say when we have this marvelous book

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and other studies that actually show the way fiscal policy works in the short term that we can’t tell.

My colleague Ajai Chopra who had run the UK article for consultations

during the crisis who is now a visiting fellow at the Institute has a very good blog on the Institute website about this thing. I encourage you all to read it but the bottom line which I would support is simply you control for a little bit of what else is going on in the world and the fact is the UK had the lousiest recovery of any major economy over that period with the exception of say Spain which was hit by a lot of things the UK wasn’t and it’s quite clear that austerity contributed to that and it’s quite clear that even though growth surprised on the upside, it came back after the austerity had eased and it’s quite clear that UK interest rates did not suddenly drop lower as though they had a huge confidence boost every time the austerity was introduced.

So it’s a little bit I think too easy to pretend for the sake of those who want

to argue austerity that we don’t know; we do. Now, Carlo I think rightly got most of the questions because the broader debate country-by-country and in general about how you pace the necessary fiscal consolidation with growth is a serious, serious debate and it cannot be dismissed and it’s very different for Greece or Portugal than it is for the UK but that’s the point not that the UK example somehow proves something general about the virtues of austerity.

José De Gregorio: Okay, and thanks very much and we’re coming to an end. I want to thank

the authors and for presenting this book here, quite interesting and I think that’s being sold outside. Also the panelists, we had a very interesting discussion. We could have gone for much longer. There are many, many issues in fiscal policy. Finally thanks to all of you for having been in this great opportunity at the Peterson. Thanks very much.