Paul Krugman, an American economist and op-ed columnist for the New York Times, wrote an interesting piece this past summer about how central bankers’ alma mater guide their future policy stance. More specifically, he looked at the influence of the University of Chicago and M.I.T. on renowned economists.
Traditionally, graduates of the University of Chicago maintain a free-market, conservative approach to their policies. If you read the business section of any major newspaper, you’ll see the terms “dovish” and “hawkish” used. Just to be clear, hawkish generally refers to those who worry about inflation. On the other hand, dovish describes economists who are more concerned with unemployment rates. Graduates from the University of Chicago are typically known to side with the former.
M.I.T., in contrast to the University of Chicago, leans more towards traditional Keynesian economics. John Keynes was a British economist whose ideas in the early-to-mid 20th century revolutionized governments’ fiscal and monetary policy. Basically, a Keynesian economist believes that you can use economic models to help propel an economy out of a downward slump. It was Keynesian economics that helped drag the U.S. economy out of the Great Depression; furthermore, it was these same theories in practice that gave a much needed boost to global markets after the financial crisis in 2008 and 2009.
According to Krugman, Janet Yellen, Chair of the United States Federal Reserve, has been successful because she has followed her own dovish policy. Unlike her predecessor, Ben Bernanke, she did not go to M.I.T; she went to University of California, Berkeley, Haas School of Business. Similar to Bernanke, Yellen implemented rigorous quantitative easing (QE). While I agree this was a necessary policy decision in the midst of economic doldrums, I think the practice may be adopted too often as a one-step solution to problems in the international economic community.
For example, in March of this year, Mario Draghi, Head of the Central Bank of the European Union (ECB), implemented QE on a wide scale. However, growth in the E.U. has been stagnant and near zero. According to a Bloomberg report, the ECB engaged in purchasing sovereign debt before in 2009-2012 from countries such as Greece, Spain and Italy. Due to the lack of results, there are questions as to whether QE is a directly translatable tool. While QE may have worked in the United States, there is no telling whether it will have the same positive effects on an region that has a significantly different regulatory and political environment.
Japan is another example of a country that has implemented the American model of QE in an attempt to stimulate growth in its own economy. Abenomics — prime minister of Japan Shinzo Abe’s economic reform plan — has been largely unsuccessful. According to a report from the New York Times, Japanese growth rates sit close to zero. Given even a small shock, the economy is susceptible to slipping into another deflationary trap. Granted that QE is only one of the three arrows of Prime Minister Abe’s plan, it shouldn’t be entirely to blame for Japan’s economic woes. However, I think both examples in Europe and Japan illustrate why it is necessary to research alternative approaches to mending broken or slowing economies. In conclusion, QE shouldn’t be seen as a one size fits all solution for foreign finance minsters to use as a get out of jail free card.