Stanley Fischer (1944–2025) - James Boughton (IMF)

 Stanley Fischer (1944–2025)

James Boughton

Analytical Series

Published on June 9, 2025

 

Stanley Fischer, who passed away in May at age 81, was one of the most important figures in the recent history of the IMF and of macroeconomics. He spent just seven years (1994–2001) at the Fund and was only the number two official in management (first deputy managing director), but he left a huge footprint.

Part of Stan’s influence resulted from the era during which he served. He arrived at the Fund in September 1994 from the Massachusetts Institute of Technology (MIT), where he had been professor of economics and chairman of the economics department. Three months later, the Mexican economy descended into financial chaos. The managing director, Michel Camdessus, was on holiday for the Christmas break, and so Stan was in charge at headquarters. Mexico’s highly respected finance minister, Pedro Aspe, had been one of Stan’s students at MIT, as had Luis Téllez, chief of staff to President Ernesto Zedillo. Even after Camdessus returned and took over the reins, Stan’s knowledge of the issues and his relationships with key officials placed him at the center of the Fund’s management of the crisis.

One of Stan’s key insights in responding to the Mexican crisis was that its potential to spread to other emerging markets—even those far from the Americas—was very real and very dangerous. At first he was almost alone in holding this view and in arguing that it justified a massive and rapid response from the IMF and other official creditors, but he soon convinced most of his colleagues. Events proved him to be prescient. The Mexican experience segued into a series of financial crises across the globe, as one emerging market after another called on the Fund to bail them out.

Crisis analysis

Throughout the rest of his time at the IMF, Stan led and oversaw much of the Fund’s crisis analysis in Washington. He also traveled to many crisis countries—Thailand in 1996 and 1997, Indonesia and South Korea in 1997, Brazil and Malaysia in 1998, Ecuador in 1999, Argentina on several occasions, and others—to negotiate with senior finance officials, several of whom he already knew quite well personally. If he had not been there with his commitment to work closely with each country to find sustainable solutions, the path through the thicket would most likely have been longer and thornier.

Stan believed strongly that the Fund had to stay engaged with countries in crisis both financially and with its policy advice. He also had strong views on the thrust of that advice: that heavily indebted emerging market economies had no choice but to implement sound macroeconomic policies, allow exchange rates to respond to market pressures, and live within the limits of available financing. That commitment attracted critics, and Stan listened carefully.

Although he did not shy away from defending his position, he was remarkably open to changing his mind. The Fund’s policy prescriptions were often caricatured under the rubric of the “Washington Consensus.” Rather than run from that tag, he defended it in a 2003 lecture as “an important component of the right approach to economic policy.” More controversially, however, he initially responded to the financial crisis of the 1990s by formulating a “bipolar” view of exchange rate policy, arguing that the only sustainable policies were either a firm peg to an external anchor such as the US dollar or a clean float with the rate determined only by market conditions. He eventually admitted, in a 2001 article, that he and others “probably have exaggerated their point for dramatic effect.”

Strength of personality

A second reason for Stan’s pervasive influence at the IMF was the strength of his personality. He inspired the staff by working harder than anyone else in the building, by at least seeming to be smarter than everyone else, and arguably being nicer than everyone else. By listening to and engaging with the staff, he became a natural mentor to all who worked with him. He could also be single-mindedly persistent. For 50 years before he arrived, the Fund had always zealously guarded the privacy of its activities and information. Stan fought hard against an entrenched culture to remake the IMF into an open and transparent organization.

On a personal note, when Stan arrived at the Fund in summer 1994, he sought me out because he wanted to learn more about the history of the IMF, and he had found the official histories to be hard going. Make it more lively! he urged me. I already admired Stan, but now I was a fan. He was particularly interested in the founders: Britain’s John Maynard Keynes, of course, but also the US official Harry Dexter White. As he prepared to leave MIT, he paid a visit to Paul Samuelson, who asked him to look into allegations that White had been secretly disloyal to the United States. Stan asked me to investigate, and that led to a 25-year quest on my part, culminating in a full biography (and vindication) of a remarkable man.

Perhaps the most remarkable aspect of Stan’s story is that his time at the IMF was just one stage in a long, varied, and highly successful career. The first stage was academic, as a professor at the University of Chicago and then MIT. He made his name practically synonymous with macroeconomics in three ways.

Varied career

First, he wrote articles that quickly became classics, most notably a 1977 paper in the Journal of Political Economy that reconciled neoclassical and Keynesian macroeconomic models and essentially created the New Keynesian school of thought. Second, he coauthored widely adopted economics textbooks for undergraduate and graduate students. Third, his courses at MIT attracted graduate students of the highest caliber, many of whom became famous in the field as academic stars (Olivier Blanchard, David Romer, and many others), central bankers (Ben Bernanke, Mario Draghi, Frederic Mishkin, and others), and other leaders.

Stan first interrupted his academic career in 1988 to spend two and a half years as chief economist at the World Bank. He returned briefly to MIT until he was lured back to Washington as Camdessus’s deputy at the IMF. After Camdessus retired in 2000, Stan stayed on for a time to guide the transition to new leadership. In 2002, he branched out further to try his hand in the private sector, becoming a vice chairman of the vast banking conglomerate Citigroup. Three years later, the governorship of the Bank of Israel opened up. Stan held dual citizenship in the United States and Israel, and he had long harbored a desire to help Israel directly. He accepted the offer to head the central bank and spent the next eight years in Jerusalem, most notably playing a major part in stabilizing the Israeli economy throughout the global financial crisis that struck in 2008.

In 2011, he made an effort to return to the IMF by becoming a candidate for managing director. That effort failed when the Fund declined to waive its rule that blocked candidates over the age of 65. Finally, for a last act, he served three years as vice chairman of the  Federal Reserve System. He retired in 2017, ending a career of nearly five decades.

These professional pursuits took Stan from a quite humble beginning, as a child living above a grocery store in Mazabuka, Northern Rhodesia; to Israel (where he met Rhoda Keet, his wife until her death in 2020); England (where he studied at the London School of Economics); the United States for much of his life; and Israel again. It was a remarkable life, well lived.

JAMES BOUGHTON is a former historian of the IMF. He has published several books, including Harry White and the American Creed: How a Federal Bureaucrat Created the Modern Global Economy (and Failed to Get the Credit).

 

Further reading:

Blanchard, Olivier. 2005. “An Interview with Stanley Fischer.” Macroeconomic Dynamics 9: 244–62.

Blanchard, Olivier. 2023. “‘Stan the Man’: On Stanley Fischer and MIT.” Policy Brief, Peterson Institute for International Economics.

Blanchard, Olivier, and Stanley Fischer. 1989. Lectures on Macroeconomics. Cambridge, MA: MIT Press.

Boughton, James M. 2021. Harry White and the American Creed: How a Federal Bureaucrat Created the Modern Global Economy (and Failed to Get the Credit). New Haven, CT: Yale University Press.

Dornbusch, Rudiger, and Stanley Fischer. 1983. Introduction to Macroeconomics. New York, NY: McGraw-Hill.

Fischer, Stanley. 1977. “Long-term Contracts, Rational Expectations, and the Optimal Money Supply Rule.” Journal of Political Economy 85: 191–205.

Fischer, Stanley. 2001. “Exchange Rate Regimes: Is the Bipolar View Correct?” Journal of Economic Perspectives 15 (2): 3–24.

Fischer, Stanley. 2003. “Richard T. Ely Lecture: Globalization and Its Challenges.” American Economic Review 93 (2): 1–30.

Loungani, Prakash. 2013. “A Class Act.” Finance & Development 50 (3): 4–7.

 

Chile Can Grow Faster – But it Won’t Be Like the 1990s Again - Si Guo, Andrea Schaechter (IMF)

 

Chile Can Grow Faster – But it Won’t Be Like the 1990s Again

 

(Credit: Igor Alecsander/iStock by Getty Images)    (Credit: Igor Alecsander/iStock by Getty Images)    Many of Chile’s current socioeconomic debates—such as those related to fiscal sustainability, pension adequacy and college loans—can be attributed to the country’s growth slowdown over the past two decades. Back in the 1990s, Chile grew 6.2 percent per year on average and was Latin America’s posterchild success story. Over time, this robust growth trend steadily waned, and by the 2020s, growth barely went above 2 percent. The IMF’s recent annual economic health check of the country (Article IV consultation) addresses how Chile can reverse this trend.   Many of Chile’s current socioeconomic debates—such as those related to fiscal sustainability, pension adequacy and college loans—can be attributed to the country’s growth slowdown over the past two decades. Back in the 1990s, Chile grew 6.2 percent per year on average and was Latin America’s posterchild success story. Over time, this robust growth trend steadily waned, and by the 2020s, growth barely went above 2 percent. The IMF’s recent annual economic health check of the country (Article IV consultation) addresses how Chile can reverse this trend.   Comparing Chile to its peers, there is scope to grow faster. Higher-income countries that were once at a comparable income level to Chile grew at a rate of around 2.9 percent per year. However, Chile faces challenges that most of those economies did not encounter at the same stage of development: such as an aging population and a global slowdown, both of which will make it more difficult for Chile to reach this pace.   Historical patterns   As countries get richer, sustaining rapid growth simply becomes harder because of diminishing gains from investment and less scope for technology catch-up. To evaluate Chile’s growth potential, we compared its trajectory with other countries when they reached similar income levels, such as Australia in the late 1980s and Korea in the 2000s. According to the Penn World Table and our calculations, Chile’s GDP per person tripled from US$8,200 in 1990 to around US$26,000 in 2025, in constant 2017 U.S. dollars after purchasing power parity (PPP) adjustment.   Comparing Chile to its peers, there is scope to grow faster. Higher-income countries that were once at a comparable income level to Chile grew at a rate of around 2.9 percent per year. However, Chile faces challenges that most of those economies did not encounter at the same stage of development: such as an aging population and a global slowdown, both of which will make it more difficult for Chile to reach this pace.   Historical patterns   As countries get richer, sustaining rapid growth simply becomes harder because of diminishing gains from investment and less scope for technology catch-up. To evaluate Chile’s growth potential, we compared its trajectory with other countries when they reached similar income levels, such as Australia in the late 1980s and Korea in the 2000s. According to the Penn World Table and our calculations, Chile’s GDP per person tripled from US$8,200 in 1990 to around US$26,000 in 2025, in constant 2017 U.S. dollars after purchasing power parity (PPP) adjustment.   Among 28 economies that crossed the US$26,000 real GDP per capita threshold between 1950 and 2010, median annual GDP growth over the subsequent decade was 2.9 percent. This benchmark is well below Chile’s 1990s boom, but still above its current trend.   Demographic and external drags   While the comparison is useful and offers some optimism, Chile faces an aging population and a less favorable global growth environment – impediments that many of these other higher-income economies did not face during their development stage.   Though still relatively young, Chile’s population is aging. According to the UN’s median population projection, Chile’s working-age population (15-64) will grow by just 0.15 percent per year during 2025-35. With modest gains in labor participation, employment will likely grow by 0.2-0.3 percent annually – below the 0.8 percent seen in the comparison group. This demographic drag alone saps ¼ percentage point from Chile’s potential growth.   Global technological trends could also weigh on Chile’s outlook. In the 1990s, information technology boosted productivity across countries. Our comparison group of countries benefitted from a U.S. GDP growth rate – taken as a proxy for global technological trends – of 3.1 percent per year on average. In contrast, economists now expect more modest U.S. growth of 2.1 percent for the next decade. We estimate that a one-percentage point reduction in 10-year U.S. annual growth translates to a further 0.8 percentage point restraint on Chile’s potential growth.   Transformational reforms   While these are rough estimates, and outcomes could vary widely, the exercise suggests a long-term growth trend of around 1.9 percent, if Chile were to perform in line with the median country and the demographic and external headwinds persisted.   So, how can Chile increase its potential and defy these drags on growth? Short-run macroeconomic stimulus is not the answer, and Chile’s economy is already balanced. The solution lies in deepening supply-side structural measures, consistent with the policy messages in our latest annual review of Chile’s economy (the Article IV consultation).   First, it is critical to make regulatory requirements more efficient. As an extreme example, it can take up to 10 years to sort out permits and navigate bureaucracy to get a large mining project off the ground. Streamlining this lengthy process would help reduce barriers to investment and support technology adoption. Similarly, modernizing regulations related to maritime transport could lower trade costs and improve Chile’s competitiveness.    To address demographic challenges, Chile could stimulate labor participation, for example by improving the access to quality childcare that would enable more women to enter the labor force.   Chile’s R&D spending is also substantially below the OECD average. Greater public-private collaboration here is essential, given limited budgetary resources. The proposed technology transfer bill, enabling university researchers to create tech companies and commercialize their work, could help narrow this gap. Finally, as the world’s largest copper producer, second largest lithium producer, and as a nation richly endowed with solar and wind resources, Chile can benefit from the high global demand for these critical minerals and through use of low-cost renewable energy.   While there is no silver bullet for growth, together these reforms improve the chances of a better outcome. Lifting Chile’s growth potential is critical for improving living standards and addressing social and fiscal pressures. Chile has an established track record of prudent macroeconomic management. Building on this solid foundation, the country can achieve stronger growth in a challenging global environment.   Among 28 economies that crossed the US$26,000 real GDP per capita threshold between 1950 and 2010, median annual GDP growth over the subsequent decade was 2.9 percent. This benchmark is well below Chile’s 1990s boom, but still above its current trend.   Demographic and external drags   While the comparison is useful and offers some optimism, Chile faces an aging population and a less favorable global growth environment – impediments that many of these other higher-income economies did not face during their development stage.   Though still relatively young, Chile’s population is aging. According to the UN’s median population projection, Chile’s working-age population (15-64) will grow by just 0.15 percent per year during 2025-35. With modest gains in labor participation, employment will likely grow by 0.2-0.3 percent annually – below the 0.8 percent seen in the comparison group. This demographic drag alone saps ¼ percentage point from Chile’s potential growth.   Global technological trends could also weigh on Chile’s outlook. In the 1990s, information technology boosted productivity across countries. Our comparison group of countries benefitted from a U.S. GDP growth rate – taken as a proxy for global technological trends – of 3.1 percent per year on average. In contrast, economists now expect more modest U.S. growth of 2.1 percent for the next decade. We estimate that a one-percentage point reduction in 10-year U.S. annual growth translates to a further 0.8 percentage point restraint on Chile’s potential growth.   Transformational reforms   While these are rough estimates, and outcomes could vary widely, the exercise suggests a long-term growth trend of around 1.9 percent, if Chile were to perform in line with the median country and the demographic and external headwinds persisted.   So, how can Chile increase its potential and defy these drags on growth? Short-run macroeconomic stimulus is not the answer, and Chile’s economy is already balanced. The solution lies in deepening supply-side structural measures, consistent with the policy messages in our latest annual review of Chile’s economy (the Article IV consultation).   First, it is critical to make regulatory requirements more efficient. As an extreme example, it can take up to 10 years to sort out permits and navigate bureaucracy to get a large mining project off the ground. Streamlining this lengthy process would help reduce barriers to investment and support technology adoption. Similarly, modernizing regulations related to maritime transport could lower trade costs and improve Chile’s competitiveness.    To address demographic challenges, Chile could stimulate labor participation, for example by improving the access to quality childcare that would enable more women to enter the labor force.   Chile’s R&D spending is also substantially below the OECD average. Greater public-private collaboration here is essential, given limited budgetary resources. The proposed technology transfer bill, enabling university researchers to create tech companies and commercialize their work, could help narrow this gap. Finally, as the world’s largest copper producer, second largest lithium producer, and as a nation richly endowed with solar and wind resources, Chile can benefit from the high global demand for these critical minerals and through use of low-cost renewable energy.   While there is no silver bullet for growth, together these reforms improve the chances of a better outcome. Lifting Chile’s growth potential is critical for improving living standards and addressing social and fiscal pressures. Chile has an established track record of prudent macroeconomic management. Building on this solid foundation, the country can achieve stronger growth in a challenging global environment.   ****   ****   Si Guo is a senior economist and Andrea Schaechter is an assistant director in the Western Hemisphere Department.

Latin America Faces Unusually High Risks - Santiago Acosta-Ormaechea, Ilan Goldfajn and Jorge Roldos (IMF)

 IMF 

Latin America Faces Unusually High Risks

April 26, 2022

By Santiago Acosta-Ormaechea, Ilan Goldfajn and Jorge Roldos

The War in Ukraine, higher inflation, tighter financial conditions, economic decelerations of key trading partners, and social discontent may dim growth prospects.

The war in Ukraine is shaking the global economy and raising uncertainty about the outlook for Latin America and the Caribbean.

The impact is being felt in Latin America through higher inflation that is affecting real incomes, especially of the most vulnerable. Policymakers are reacting to this challenge by tightening monetary policy and implementing measures to soften the blow on the most vulnerable and contain the risks of social unrest.

But there are other risks looming. A possible escalation of the war could eventually lead to global financial distress and tighter financial conditions for the region.

In addition, the ongoing tightening of monetary policy in the United States, as the Federal Reserve takes a more hawkish stance, could eventually affect global financial conditions.

Higher global and domestic financing costs can accelerate capital outflows and represent a challenge for the region, given large public and external financing needs in some countries and the limited resources to finance investment in the region.

Any greater growth deceleration in China, because of the pandemic or other reasons, could also have an impact on key export prices and trade in the region. All these risks cloud growth prospects for Latin America and require policy action.

Latin America’s rebound poised to slow

Even before the war, the region’s recovery from the growth-sapping pandemic was losing momentum. After a sharp rebound last year, growth is returning to its pre-pandemic trend rate as policies shift, slowing to 2.5 percent for 2022. Exports and investment are resuming their role as main growth drivers, but central banks have had to tighten monetary policy to combat an increase in inflation.

We forecast Brazil’s expansion will slow to 0.8 percent this year following last year’s growth of 4.6 percent. Mexico will decelerate to 2 percent. Colombia will likely post a lower deceleration with growth at 5.8 percent. Growth in Chile and Peru will be 1.5 percent and 3 percent, respectively, pointing to very significant reductions relative to their prior year’s double-digit rates.

Responding to higher food and energy prices 

Poverty and inequality remain key concerns as well given that the increase in inflation has an uneven impact on the population. The most vulnerable groups in the region are being hit hard by the increase in basic food and energy prices, while still struggling to recover from the economic impact of the pandemic.

Indeed, since the war began, several countries in the region have acted to contain the effects of rising prices on vulnerable groups—ranging from tax and import tariff reductions to price caps or social transfers.

Close to 40 percent of countries have introduced new measures, mostly on the tax side, with an estimated average fiscal cost equal to 0.3 percent of gross domestic product for this year.

To ensure social cohesion and reduce the risk of social unrest, governments should provide targeted and temporary support to low-income and vulnerable households, while allowing domestic prices to adjust to international prices. This would help vulnerable groups and contain fiscal costs, while also incentivizing production and restraining consumption. In countries with well-developed social safety nets, access could be expanded to temporarily cover larger groups of the population.

Where safety nets are not well developed, governments can implement temporary mechanisms to smooth the pass-through of international price surges to domestic prices. Although this strategy would protect households from the volatility of commodity prices, it may also have a significant fiscal cost while distorting price incentives for consumers and producers.

Countries benefiting from improvements in their terms of trade—a measure of prices for a country’s exports relative to its imports—may find it easier to finance these new measures. However, any additional fiscal space should be used wisely given the unusually high risks surrounding the global recovery and the evolution of commodity prices, as well as the increasing costs for government financing.

Inclusive consolidation is needed

With public debt-to-GDP ratios above pre-pandemic levels and borrowing costs rising amid higher local and global interest rates, countries will need to ensure the sustainability of public finances to help preserve credibility and rebuild fiscal space. However, it will be equally important to implement measures that protect the most vulnerable.

This will require a strategy that focuses on inclusive consolidation. Spending on social programs, health, education, and public investment should be protected, while implementing tax reforms (such as strengthening personal income taxes) that will bolster growth in an inclusive manner and help countries maintain fiscal sustainability.

Spillovers in a “Post-Pandemic, Low-For-Long” World - Joint BIS, BoE, ECB and IMF Conference, April, 26-27, 2021

 Para os que amam política monetária (devem ser poucos), ou gostam de relações econômicas internacionais (devem ser mais numerosos) e todos aqueles que se interessam pelo futuro econômico deste nosso planetinha redondo (no qual o Brasil aparece desgarrado)...

Spillovers in a “Post-Pandemic, Low-For-Long” World

Joint BIS, BoE, ECB and IMF Conference

April 26-27, 2021

In recent decades, countries have deepened their economic and financial interdependencies. Over the same period, global interest rates have fallen to historic lows, despite a slight pick-up this year. In this environment, countries have increasingly adopted policy mixes featuring unconventional monetary policy, foreign exchange interventions, macroprudential measures and capital flow management to cope better with the spillovers of a highly interconnected global economy. The COVID-19 pandemic introduced an additional layer of complexity, with consequences for the global economy, public finances, monetary policy and financial fragilities. This conference aims to close gaps in our understanding of the international transmission of local vulnerabilities and shocks in a post-pandemic, high-debt, low interest rate environment.

Monday. April 26, 2021 (ET)

To register for the conference, please email: 

SpilloverConference2021@ecb.europa.eu

Opening Session: 8:00 am

Welcoming Remarks – Fabio Panetta, Member of the Executive Board of the ECB

Monetary Autonomy in a Globalised World

SESSION 1: Chair: Livio Stracca, ECB, 8:30 am

What Goes Around Comes Around: How Large Are Spillbacks from US Monetary Policy Really?

Max Breitenlechner (University of Innsbruck), Georgios Georgiadis (ECB), Ben Schumann (Free University of Berlin)

Discussant: Silvia Miranda-Agrippino (Bank of England)

9:15 am:

Supply Spillovers During the Pandemic: Evidence from High-Frequency Shipping Data

Diego Cerdeiro (IMF), Andras Komaromi (IMF)

Discussant: Nitya Pandalai-Nayar (University of Texas at Austin)

10:00 am: Interest Rates and Foreign Spillovers

Roberto de Santis (ECB) and Srecko Zimic (ECB)

Discussant: Chiara Scotti (Federal Reserve Board)

10:40 am: Break

SESSION 2: Capital Flows and Macroprudential Policy

Chair: Angela Maddaloni, ECB, 11:00 am

Surges and Instability: The Maturity Shortening Channel

Xiang Li (Halle Institute for Economic Research), Dan Su (University of Minnesota)

Discussant: Mahvash Qureshi (IMF)

11:45 am: Spillovers at the Extremes: Macroprudential Tools and Vulnerability to the Global Financial Cycle

Kristin Forbes (MIT Sloan), Anusha Chari (University of North Carolina), Karlye Dilts-Stedman (Federal Reserve Bank of Kansas City)

Discussant: Damiano Sandri (IMF)

12:25 pm:

Session Ends

April 27, 2021 (ET)

SESSION 3: Covid Effects and Monetary Policy Responses

Chair: Katrin Assenmacher, ECB, 8:30 am

An Event Study of COVID-19 Central Bank Quantitative Easing in Advanced and Emerging Economies

Alessandro Rebucci (Johns Hopkins), Jonathan Hartley (Harvard University), Daniel Jimenez (EAFIT University)

Discussant: Kristina Bluwstein (Bank of England)

9:15 am: The Calming of Short-term Market Fears and its Long-term Consequences: The Federal Reserve's Reaction to COVID-19

Lerby Ergun (Bank of Canada), Mattia Bevilacqua (London School of Economics), Lukas Brandl-Cheng (London School of Economics), Jon Danielsson (London School of Economics), Andreas Uthemann (Bank of Canada), Jean-Pierre Zigrand (London School of Economics)

Discussant: Saleem Bahaj (Bank of England)

10:00 am: ECB Euro Liquidity Lines

Silvia Albrizio (Bank of Spain), Ivan Kataryniuk (Bank of Spain), Luis Molina (Bank of Spain)

Discussant: Inaki Aldasoro (BIS)

10:40 am: Session Ends

SESSION 4: Exchange Rates and Currency Exposures

Chair: Luca Dedola, ECB, 11:10 am

The Original Sin Redux: A Model-based Evaluation

Nikhil Patel (BIS), Boris Hofmann (BIS), Steve Pak Yeung Wu (University of British Columbia)

Discussant: Ozge Akinci (Federal Reserve Bank of New York)

11:45 am: The Exchange Rate Insulation Puzzle

Giancarlo Corsetti (Cambridge University), Keith Kuester (University of Bonn), Gernot Mueller (University of Tubingen), Sebastian Schmidt (ECB)

Discussant: Anna Lipinska (Federal Reserve Board)

12:25 pm: Session Ends

O FMI agora se preocupa com a concentração de renda nos EUA e acha que as políticas públicas devem colaborar para reduzi-la

 

VIEW IN BROWSER    Dear Colleague, Tomorrow here in Washington is the inauguration of Joe Biden as the 46th president of the United States. Among the many crises on his plate, inequality is perhaps the most pervasive. Heather Boushey, an incoming member of President-elect Biden's White House Council on Economic Advisors, carved out a blueprint to address this very issue in our latest edition of F&D. She writes that workers and their families on the wrong side of the many US economic disparities are there for several reasons—including a stubborn reliance by policymakers on markets to do the work of government, and the racism and sexism, sometimes written into law, that blind policymakers to injustice and to economic sense. Interested in learning more? Jump to the 1800-word piece or download the PDF. I've also included the full article below. ### The COVID-19 pandemic is shining an unforgiving spotlight on the many inequalities in the United States, demonstrating how pervasive they are and that they put the nation at risk for other systemic shocks. To stop the spread of the virus and emerge from a crushing recession, these fundamental inequalities must be addressed. Otherwise not only is a slow economic recovery more than likely, but the odds grow that the next shock—health or otherwise—will again throw millions out of work and subject their families to fear, hunger, and lasting economic scars. Before the pandemic, the United States was in the midst of a decade-long recovery from the Great Recession, which began in December 2007. But not all Americans experienced that recovery in the same way. The top 1 percent emerged as strong as ever in terms of wealth, regaining what they had lost by 2012. As of March 2020, however, US working- and middle-class families had barely recovered their lost wealth, and many families, especially those of color, never recovered. Even amid a strong recovery, the United States was burdened by extraordinary economic and racial inequality. Today, stark differences among US workers and their families make the current recovery neither U- nor V-shaped but rather one that resembles a sideways Y, with those benefiting from a stock market recovery or employed standing on the branch of the Y that points up unaffected by the recession, and those on the bottom branch facing perhaps years of struggle. And there are stark differences of race and class between the upper and lower legs of that sideways Y. This recession provides an opportunity for policymakers to address these inequalities with transformative policy changes to produce a healthier and more resilient economy that delivers strong, stable, and broad-based growth and prosperity. Disparities abound Workers and their families on the wrong side of the many US economic disparities are there for several reasons—including a stubborn reliance by policymakers on markets to do the work of government and the racism and sexism, sometimes written into law, that blind policymakers to injustice and to economic sense. This article will identify specific causes of economic inequality in the United States and then explain how to address them. Markets: Beginning in the 1980s, conservative economists began to make the case that unfettered markets were the only way to deliver sustained growth and well-being. This ideology, with modest exceptions, has governed US economic policymaking ever since. But it has not delivered. Moreover, the supposedly neutral and fair rules that govern markets have in fact shifted economic risk away from corporations and the wealthy toward medium- and low-income families. This has never been more apparent than now, when the coronavirus has caused mostly low-income workers to either lose their jobs or have to work in employment that exposes them to the risk of contracting and spreading the disease. Tax cuts, weak public investment: President Donald Trump’s 2017 tax cut, which benefited largely the better-off, is only the most recent manifestation of a tax-cutting philosophy that has governed US fiscal policy for decades. These measures have starved the nation of resources that could be used to fund basic governmental functions and critical public investments. As a result, public investment as a share of GDP—the value of goods and services produced in the United States in a year—has fallen to its lowest level since 1947. Eroding worker power: The ability of US workers to bargain for higher wages and benefits and better and safer working conditions has been sapped by years of anti-union court and administrative rulings. And in 27 states, right-to-work laws make it harder for unions to form. As employers gained the upper hand, wages stagnated, and worker safety has suffered, especially during the pandemic. Economic concentration: US antitrust policy and enforcement have allowed industries across the United States to become increasingly concentrated, giving large businesses market power to set prices, eliminate competitors, suppress wages, and hobble innovation. What’s more, there is evidence that this is dampening firms’ investment. Some are thriving in the midst of—indeed because of—the pandemic, while small businesses struggle to survive. Measuring the economy: Before the 1980s, when US economic inequality began its upward trajectory, growth in GDP was a reasonably reliable indicator of the well-being of most Americans. But as economic inequality has risen close to its 1920 levels, the benefits of GDP growth have gone disproportionately to the top 10 percent of earners, while income growth for the vast majority of people has been slower than that of GDP—in some cases, none at all. For that reason, GDP reflects mostly how the better-off are doing. As GDP recovers in the coming months, therefore, it will give policymakers false signals about whether average Americans are recovering. Racism and sexism: The disparate health and economic consequences of the coronavirus recession reinforce the reality and history of racism and sexism in the United States. The median earnings for a Black household are 59 percent of those of a White household, and for men and women of all races, a median woman earns 81 cents for every dollar earned by a man. The results of job segregation are apparent, with health care and service workers on the pandemic front lines. Despite being essential, some of these jobs—in which women and minorities are overrepresented—are the least likely to have benefits such as paid sick time or employer-provided health insurance. These problems are largely the result of decades of failed policies supported more by ideology than evidence. A distorted economic narrative that lionizes markets has led to the weakening of public institutions and the acceptability of less funding for democratic institutions of governance, greater economic concentration, reduced worker power, and the discriminatory effect of laissez-faire labor rules. The role of policy choices in arranging the market structure is unmistakable and enduring. Building a strong, equitable economy Transforming the US economy requires policymakers to recognize that markets cannot perform the work of government. The first step is to eradicate COVID-19. It has to be the first priority, not only for public health but also for the US economy. Beyond that, encouraging a strong and sustained recovery that delivers broadly shared growth also requires the United States to address its long-term problems: a costly health system that leaves millions with insufficient care, an education system designed not to end inequality but to preserve it, lack of basic economic stability for most families, and climate change. Major public investments are required to deal with each issue. While it is not necessary to worry now about paying for them, the nation should put in place significant tax increases, primarily or entirely on the wealthy, to begin investing in these long-term solutions. The country should tax the enormous wealth concentrated at the top that is being saved, or kept overseas, and not being invested in the economy or in solving societal problems. Policymakers also must address the economic concentration that has created monopsony power (a single or handful of buyers or employers) that keeps wages down and threatens small businesses, which are the lifeblood of innovation and economic dynamism. The first step is to ensure that the recession and the programs designed to help businesses survive the crisis don’t exacerbate this trend. Thus far, federal policies to address the economic downturn have provided far greater aid to large businesses than to small ones. Policymakers also must ensure that federal government funds are directed to productive uses that support workers and customers, and not to rewarding wealthy shareholders. Corporations receiving aid should be barred from issuing dividends and carrying out stock buybacks, and banks should be required to suspend capital distributions during the crisis to support lending to the real economy. Even more fundamental to addressing excessive concentration is strengthening US antitrust enforcement, which is weaker than it has been in decades. The antitrust laws themselves also need to be bolstered, particularly with respect to the rules governing mergers and exclusionary conduct. Legislators should consider creating a digital regulatory authority to enforce privacy laws and enhance competition in digital markets. The country also needs to better understand who benefits, or does not, from recovery policies and what further actions are needed. Because overall GDP is not up to that task, income must be disaggregated at all levels to measure progress or lack thereof for all groups—which would enable the United States to lay the groundwork for understanding what other actions are needed to ensure more people benefit from the recovery. US economic inequality is firmly tied to the issue of racial inequality. The unmistakable message of the Black Lives Matter movement is that Americans of color never have been able to trust government to act on their behalf. Government must work to ensure that low-income Black, Latinx, and Native American people can both develop and deploy their talents and skills in the economy. Taxing wealth, which is disproportionately owned by White Americans, is one solution. But for that to address racial inequities adequately, the proceeds of the wealth tax must benefit the majority of the nonwealthy. The proceeds must be directed to the most urgently needed investments, such as in COVID-19 testing and treatment in communities of color, in policies that expressly and progressively support low-wage workers and care workers, and in engagement with minority-owned small businesses. Otherwise, pervasive inequities will be further entrenched. A significant reason for the gender earnings gap is the lack of a national paid family and medical leave policy and the absence of a national program to ensure that families have access to quality, affordable childcare and prekindergarten education. Families with children that do not have access to paid leave and childcare—or cannot afford them—have little choice but to put careers on hold. This happens to women far more often than to men. Legislation has been introduced in Congress to accomplish both of these goals, and these measures should get serious consideration in the next Congress. Reason for optimism There is reason to believe that the United States can enact policies to transform its economy and society. Until recently, some of the conversations taking place among policymakers and around dinner tables—inspired by COVID-19, the deep recession, the Black Lives Matter movement, and the recent presidential election—would have been relegated to the edges of public debate. Today that is not the case. Yet the US political system is beset by deep partisanship and a constitutional and electoral system that makes it far easier to block transformative policies than enact them. But I am an optimist, and I still believe that the country could be at an inflection point, with the advantage going to those who develop and advocate progressive policies to reduce inequality and build an economy that produces strong, stable, and broad-based growth. ### As always, if you have any comments or feedback about this article, or if you have ideas about future contributors and topics to explore, please do write me a note directly. I would love to hear from you. Take good care and see you next week, Rahim Kanani Digital Editor, F&D rkanani@IMF.org _____ Surprise a colleague: forward this email First-time reader? Sign up here Update your profile for tailored content View all IMF newsletters