A Nobel Prize winner in Luxembourg
Since winning the Nobel Prize in Economics in 2004, Finn Kydland’s schedule has been packed with a lot of travel. He was the keynote speaker at the Luxembourg School of Finance 10th anniversary lecture. In an interview with LFF, he speaks about inconsistency in government policy, 54 central bank presidents in Argentina and the father of the euro.
I read in biographical notes that during the second half of 1969, your fate was sealed; you would become an academic, and economics would be your field. Earlier in your life though, it didn’t look like a possible outcome!
I happened to take a course from somebody who turned into my mentor so to speak and that was very important. He taught me a lot about research. I found it very interesting and he suggested becoming his research assistant. Eventually it became clear that in this field I ought to take a doctorate and the rest is history. I sometimes joke that I was saved from a boring life.
What would have been the likely alternative?
With the educational path I was on, the business school in Bergen in Norway, educated people ended up in industry and otherwise; I imagine that eventually I would have worked my way up to director or something. Presumably I would have made much more money but I was happy being steered in the direction of something I loved to do and have done ever since.
Originally you are from Norway. In what way has that shaped your way of working and how you look at things as an economist?
I grew up in Norway and went to the United States for the first time to do my doctoral studies. I went back to Norway afterwards to teach for three years but ended up back in the US.It is hard to describe how this has affected me but it is a fact that Norwegians think differently than Americans. For instance, where I grew up in Norway nobody would think of the Nobel Prize as a big deal; it is something the Swedes came up with (laughs).
In what way has the Nobel Prize changed your life?
I have enjoyed the increased stability, and the ability to travel internationally and give talks like the one in Luxembourg at the occasion of the 10th anniversary of the Luxembourg School of Finance. That is the main way in which it has changed. My talks are usually based on the research I have done myself. I don’t like to talk about stuff I don’t know anything about.
Time consistency of government policy is one of your main topics. Is short-run thinking prevailing today?
I like to use examples, especially when it is about countries I have studied myself, namely Argentina and Ireland. Argentina is my prime example of a country that suffers from what I call the time inconsistency disease. Policy seems to be very short run-oriented, which is bad for long run sustainable growth. You see it in monetary policy but also in fiscal policy.
What are the signs of inconsistency in monetary policy?
In countries where monetary policy is consistent and somewhat separated from political pressure through the independence of the monetary policy makers, the head tends to be the head for quite a long while. In the United States for example, if you go back to 1950, Ben Bernanke is only the sixth head of the Federal Reserve since then. In the case of Argentina, I looked at the list going back to 1945 – a 68-year period – and there have been 54 central bank heads. On average, this is a year and a quarter.
2002 was an especially tumultuous year; in that year the head changed three times. If he doesn’t do what the government tells him to do he has to go. There was a recent example three years ago. President Cristina Fernandez de Kirchner wanted her hands on the central bank reserves. The President of the central bank refused to do that, so he was fired and replaced by someone who was willing to hand the reserves to her.
What about Ireland?
The reason I like Ireland is that their economy had not been doing very well in the decades leading up to 1990. Some decades before, they had made secondary education free of charge. So one way to put it: you are in 1990, you have a potential workforce but there is no capital. There are no factories; there are insufficient machines. So Irish policy makers reacted and said to domestic and foreign companies: if you want to invest in Ireland, these are your company tax rates; not just for this year or the year after but for the next 20 years.
Basically this is the lifetime of a typical new investment project or a new factory. That had an enormous effect on economic growth in Ireland. For a long time, the country’s GDP was hovering around that of Spain or Greece and well below countries like UK or Germany. Then came 1990 and within ten years Ireland had surpassed any of these other countries.
What is the situation like in Ireland today?
I wish that the story had a better ending. After about a dozen years of growth, banks were tempted by unwise decisions and when the financial crisis hit the country in 2008, several of them were in big trouble and the government decided to bail them out, which created a huge cost to taxpayers; I think that it was a terrible decision.
Talking about the Eurozone as such, would some countries be better off if they were not members of the club?
Sometimes I read an interview of the Canadian Nobel-prize winning economist Robert Mundell, whom I regarded as the father of the euro. As I recall, in his writings about currency zones, and this is just based on my memory, he shows that the currency zone is likely to be successful the more similar the countries are. I ask you: are these countries similar? They don’t seem very similar.
I don’t think that the Eurozone was a well-planned and well-conceived project from the very beginning. When I was asked about it back to when trouble first started, I would always say: well, I don’t understand fiscal policy in the Eurozone and that seems to have turned into a big problem. I also would like to say that a good thing about the problems of the Eurozone was that it has unveiled other, more structural problems in these countries.
What you see in “problem” countries like Portugal, Italy and Spain is that from 1960 to 1990, they partly grew at a healthy rate but have remained been flat for the 20 years since then. That is something you have to deal with because countries can’t have sustainable growth, especially when wages go up with increases in productivity. Their focus should be to make the productivity curve start growing again like it did before 1990. CW
Copyright pictures: Michel Brumat