Radical Conditionality: Rewriting the Rules of Macroeconomic Policy

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This article is part of a series in which OECD experts and thought leaders  from around the world and all parts of society  address the COVID-19 crisis, discussing and developing solutions now and for the future. It aims to foster the fruitful exchange of expertise and perspectives across fields to help us rise to this critical challenge. Opinions expressed do not necessarily represent the views of the OECD.

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By Eric Lonergan and Mark Blyth

The global pandemic has re-written the rules of global macroeconomic policy for us. We have witnessed significant monetary and fiscal policy innovation; growing unwillingness to accept that the design of stimulus should be independent of broader environmental and social goals; and a far more acute focus on the competence and scope of the State.

These trends were already in evidence pre-pandemic, as we outlined in our book Angrynomics. In the book we argue that populism is a coherent response to economic and political failure. We argue that mainstream politics lost its motivating force because centrist politics and neo-liberal economics had major shortcomings, and were indeed complicit in the two conjoined crises facing OECD populations: rising wealth and income inequality, environmental self-destruction, and a consequent outpouring of social distress.

In response to the pandemic, mainstream policy actors have finally shown a desire to act on these issues. But we believe that this response needs to be both better focused and normalised in order to preserve liberal democracy. Meaningfully tackling wealth inequality and ending environmental destruction should be recognised as interdependent urgent crises, not just opportunistic dimensions of the pandemic policy response that policymakers could renege on once COVID has abated.  

To that end, we advocate a strategy of radical conditionality as the policy criterion that all States should apply to address these interdependent crises. Specifically, when States intervene to support the private sector going forward, we argue that they must tie the conditions of support to abating these crises. Two present examples show us how this could be done. First, Germany has targeted its fiscal response to COVID-19 at super-charging its transition to a green economy and its leadership in sustainable energy and transport. Second, Denmark’s climate law, where regardless of who wins any future election, the carbon reduction targets must be met, a politics of ‘we can disagree about means, but not ends,’ shows a more encompassing approach.

Also on the Forum Network: Reimagining Capitalism in a World on Fire by Rebecca Henderson

There have also been important innovations in monetary policy that are both under-recognised and under-exploited that can push an agenda of radical conditionality forward.

For example, dual interest rates are now an explicit policy of the European Central Bank. Under this system, the ECB sets official interest rates, which determine money market rates, independently of the interest rate on targeted lending. In doing so the ECB has solved a range of technical problems the effective lower bound, and the risks to financial intermediation of negative interest rates. But we could do more. Specifically, we could use dual rates to actively target sustainable energy and investment in green transport directly. ECB President Christine Lagarde’s recent suggestion that asset purchases should be made consistent with EU goals on carbon emissions could be turbocharged by applying dual rates to lending in these areas.

However, the one glaring absence of the pandemic response is anything approximating a serious plan to tackle inequality of wealth and income, which should be motivated by the obvious fact that economic uncertainty is causing huge social distress and feeding a desire for self-defeating simplistic, national solutions. Radical conditionality should therefore link decarbonisation and inequality in a meaningful way. For these reasons we have proposed a State-balance sheet driven approach to spreading asset ownership, and a combination of measures to provide both unconditional and cyclically-contingent income support. By broadening asset ownership we share the upside of green investment with those most affected by inequality.

Fiscal, structural and monetary policy all have a role to play. Cash transfers under fiscal policy should be made automatic in line with the Sahm Rule. In other jurisdictions, where fiscal policy is contained and monetary policy is out of ammunition, the central bank can implement similar policies for example using perpetual zero-interest rate loans to households to create consumption support.

Also on the Forum Network: How to Make the World Add Up by Tim Harford

One highly effective way for the State to use its balance sheet to address wealth inequality is through the creation of citizen wealth funds. We argue that given its current cost of capital, where the State can borrow for up to twenty years at negative real interest rates, the case for debt-financing citizen wealth funds is compelling. Not only should the State finance large-scale purchases of global equities with long-dated zero coupon debt, it should also directly finance the creation of assets. Ownership in these citizen wealth funds could be distributed to the 80% of the population with low asset ownership. Eventual distribution will be contingent on asset growth and debt repayment.

We have the policy tools and a record low cost of capital. Political will and policy leadership needs to step up.

The pandemic has shown the power of targeted state intervention combined with market forces to address large scale social and economic challenges. For too long we saw State and market as opposing forces rather than complements. A strategy of Radical Conditionality, where policy actions are conditional on meaningfully addressing these conjoined crises can take this complementarity further. We have the policy tools and a record low cost of capital. Political will and policy leadership needs to step up. Only by fundamentally addressing these challenges can we address their dangerous spillover into the political realm. And only by doing so can we avert the climate catastrophe and rebalance our economies and societies.

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Eric Lonergan & Mark Blyth

Co-authors, Angrynomics

Eric Lonergan is a macro fund manager, economist and author. He has a BA in politics, philosophy and economics from Pembroke College, Oxford, and an MSc in economics from the London School of Economics. Eric is the author of “Money”, first published in 2009, and the co-author of “Angrynomics”, published in 2020. ------ Mark Blyth is the William R. Rhodes ’57 Professor of International Economics, at the Watson Institute for International and Public Affairs, at Brown University. His research focuses upon the causes of stability and change in the economy and why people continue to believe stupid economic ideas despite buckets of evidence to the contrary. The power of economic ideas is a common theme in Blyth’s work, as seen in his recent award winning Book, Austerity: The History of a Dangerous Idea (New York: Oxford University Press 2015); The Future of the Euro (New York: Oxford University Press 2015), and in his most recent book Angrynomics (New York: Columbia University Press 2020).


Go to the profile of Elizabeth Villagomez
about 1 year ago

Thank you. I enjoyed this article very much. I have proposed a debt facility for swaping debt for gender equality that will hopefully be taken up by IFIs and involve the UN system to support countries in deepening their financing efforts for gender equality. I think that this radical conditionality concept is along the lines of what I am proposing since the certification in this case would come from international legally binding conventions (CEDAW) ensuring that the investments are geared towards tackling structural gender inequality. I also believe that a new world agreement on monetary matters is necessary (a new Bretton Woods) that makes financial inclusion a reality for billions. Following!!