|9:00||Introduction:||Kevin A. Hassett, AEI|
|Panel I: Monetary Policy|
|Discussants:||Marvin Goodfriend, Federal Reserve Bank of Richmond|
|Athanasios Orphanides, Federal Reserve Board|
|Kurt Schiltknecht, BZ Bank|
|Moderator:||Bennett McCallum, Carnegie Mellon University|
|10:00||Panel II: International Reform|
|Discussants:||Charles W. Calomiris, Columbia University and AEI|
|Adam Lerrick, Carnegie Mellon University|
|Moderator:||Anna Schwartz, City University of New York|
|11:00||Panel III: Political Economy|
|Discussants:||Alex Cukierman, Tel-Aviv University|
|Scott Richard, Morgan Stanley|
|Moderator:||Thomas Romer, Princeton University|
A Tribute to Allan H. Meltzer
On February 26, 2003, friends and colleagues of Allan H. Meltzer gathered at AEI to discuss his wide-ranging and influential work over more than fifty years as a distinguished economist. Three panels discussed his contributions in applying monetary theory to policy actions, his efforts at reforming international financial institutions, and his innovations in the way the political economy is analyzed and modeled by economists.
Kevin A. Hassett
Allan Meltzer’s work and life has touched so many economists and policymakers that there is no doubt his influence will last for many generations to come. Allan’s career began with a 1959 dissertation that produced two papers-one published in Econometrica, and another in the Journal of Political Economy. His influential career has been spent breaking new ground in three areas: monetary policy, international financial reform, and political economy. Students, colleagues, and others have benefited from Allan’s presence. He has been a vocal supporter of some of my unorthodox (and unpopular) approaches, and helped to get one of my first papers published. I know he has helped plenty of others along the way also.
Panel I: Monetary Policy
Federal Reserve Bank of Richmond
It is a great pleasure to comment on what Professor Meltzer’s research has meant for monetary policy and what knowing Allan since my early days at the Fed has meant to me. Allan was one of the principal advocates of monetarism, emphasizing the relationship between the money supply and output before the Fed began experimenting in the 1980s. I cannot underestimate the influence of the Carnegie-Rochester conferences over the years. The conferences allowed me to take the latest thinking from inside the Fed to the academic community and to meet the most skilled academic economists in the country. The papers that came out of the conferences meant a lot, but the quality of the discussion meant a lot more. Allan’s style and substance was unique and inspirational to me in that he presented powerful points using a blend of economic theory, institutional knowledge, knowledge of economic history, and data he did it with passion and commitment as if economics really mattered.
I have been amazed at the number of times I have written papers on topics I thought were esoteric, only to find out later that Allan had been there before me. I wrote a paper modeling discount window borrowing and the Fed’s new monetary control procedures, which Allan and Karl Brunner had written about in the 1960s. There was once a great debate about ambiguity and secrecy in the central bank. Central bankers used to think secrecy was the best way to facilitate a market economy. The research from the Carnegie-Mellon conferences helped spread the idea that stating the policy goal and the procedures used to get there could create confidence and the ability to hit those goals.
Allan has also advocated the monetarist transmission mechanism, saying that short-term interest rates are just one of the ways the central bank can transmit effects to the economy. Allan has provided a road map for how the Japanese central bank could continue to perform monetary policy at a 0 percent interest rate. Allan’s research is valuable for helping us understand how the political economy of the central bank has resisted monetarism and allowed paralysis in an inflationary setting.
Federal Reserve Board
I have been a fan of Allan Meltzer since I first discovered his work as a young economist at the Federal Reserve in 1990. Allan’s book is the most comprehensive history of policymaking at the Federal Reserve and it provides several examples of why we should care about history. Allan strives to highlight which simple-minded mistakes influenced subsequent policy errors. For example, in 1937 the country was coming out of the Great Depression with a newly reorganized central bank, an opportunity where new leadership could help the economy fully recover. At the time, bankers were incorrectly emphasizing creating policy around the short-term interest rate instead of the stock of money. With nominal rates equal to zero, bankers tightened the money supply out of inflationary fears, leading the country into a sharp and painful recession just two years after reorganization. The Bank of Japan is today facing virtually the same situation as they attempt to recover from the awful 1990s. Looking at interest rates and not the money supply, the BOJ tightened to avoid inflation. Allan was wise enough to draw the parallels and was not surprised when Japan returned to recession after tightening policy.
Allan does not bash past policymakers. He points out the people who made these decisions were not chicane or evil. They acted as they did because of the beliefs they held about their responsibilities-Allan examines their thinking and how their beliefs caused them to make these mistakes. Perhaps policy problems of today could benefit from the simple lessons of Allan’s history.
It is a great pleasure for me to be here representing the old continent. Allan and Karl Brunner had a big impact on European, and particularly Swiss, monetary policy. When I met Allan and Karl we had just changed to a flexible exchange rate and had no idea how to run monetary policy. However, the Swiss bank was fortunate to have at least one advocate of the monetarist approach who had spent the year at Carnegie Mellon studying the money supply in Switzerland and establishing Swiss monetary statistics.
Allan and Karl organized the Konstanz Conference, an important event in Europe. Young European economists were meeting young U.S. economists, researchers, and people from the Fed to share ideas and learn about monetary policy. The list of people there includes many who are now leading economists in Europe. Konstanz had a reputation as a place where Americans, and especially Allan, were extremely aggressive. Quite to the contrary, when I presented a paper in 1976 I was well received and found Allan to be extremely friendly. Of course, we were the only bank with a money stock target and the only bank controlling the money supply with a monetary base approach.
Allan would always explain things in a very straightforward way and could understand how policy decisions were made. Konstanz helped spread Allan and Karl’s influence through Allan’s friendship with the future director of Central Bank in Japan and through my later association with Margaret Thatcher and the Bank of England. Allan and Karl were persistent critics whenever the Swiss Bank would depart from monetarist policies, logging hundreds of phone calls in an effort to influence the stubborn Swiss. One of the conclusions of the Carnegie conferences was that central banks should abstain from fine-tuning or fixing money stock targets and instead control the trend of the money supply. Switzerland has really benefited from Allan’s work and we owe him gratitude for our low inflation and stability since we started monetary policy.
Carnegie Mellon University
As a departmental colleague of Allan’s I have seen him on a day-to-day basis where I have observed both the best and the worst of his activities. It is true that some outstanding economists who promote libertarian social policies behave in a somewhat illiberal and dictatorial manner towards administrators, colleagues, and students. Allan’s behavior is in fact genuinely libertarian and generous. He promotes the department, raises funds, expresses his views clearly and strongly but not coercively, and is always ready to discuss at length any professional topic, policy related or theoretical. He could not have his amazing roster of friends if he were in his office every day, but when he is in, his door is always open, and this has been enormously helpful to me.
Allan’s public-spirited generosity extends to the lineup of professional organizations he has founded, mostly in collaboration with Karl Brunner, which have in turn spawned a number of other institutions across the U.S. and Europe. These have had a substantial influence on the entire field of monetary economics throughout the last thirty or so years. His work has reflected a healthy blend of tenacity and flexibility. He is able to adjust his views to new and fruitful ideas as they come along. Notably, he and Karl were on the vanguard of acceptance of rational expectations analysis and early on he adopted an activist concept of monetary policy rules. In all his work, Allan has stressed policy relevance and the importance of keeping empirical regularities in mind. There is only one way that Allan’s work is open to the charge of lack of realism: his ever-present cheerful optimism.
Panel II: International Financial Institutions
City University of New York
International reform is a subject that has occupied Allan’s thoughts and activities in recent years, including his celebrated chairmanship of the congressional advisory commission on international financial institutions. Charged with considering the future role of seven international financial institutions, Allan executed the mandate of the commission in an exemplary manner that should serve as a model for the chair of any commission established in the future. In an even-handed way, Allan allowed defenders and critics equal time and commissioned papers from each of the seven international financial institutions. The press misinterpreted the split vote on the proposed reform of the World Bank and the IMF. In fact, all of the commission members were in agreement on a substantial portion of the recommendations. This consensus stands as a tribute to Allan’s skill in moderating the commission.
Charles W. Calomiris
When I read the topic of the discussion, I thought of how Allan has become one of the most enormously influential intellectuals both inside Washington and around the world in reforming international financial institutions and central banks. This has spurred me to ask: What is Meltzerism? The basic recipe is confidence in the basic application of logic and facts and an unwillingness to embrace dubious intellectual fads, which are amazingly prevalent in international finance. We see examples of this in the Mexican crisis in 1995, the alleged Keynesian liquidity trap in Japan during the mid to late 1990s, and his criticism of the behavior of the IMF and the World Bank. Allan has consistently played the role of the little boy commenting on the emperor’s new clothes. Unlike the boy in the story, Allan has maintained a creative role in advocating reform, repeating one of his favorite expressions, "Yes, we can do better." We can structure grants that actually achieve positive benefits and avoid leakages of funds. His observations of Latin American debt in the 1980s, European exchange rate pegs in 1979, and Japanese policy in the 1990s have remained consistent as the intellectual community initially opposed him and eventually came to support his views.
Why is Allan Meltzer so Melzteristic? He is a truly gifted scholar, trained in history, conversant in the affairs of nations, and able to sift among those theories that best fit the facts. He is also a person of high integrity, willing to state simple truths and embrace useful ideas, even old ones, when they are right. Working with him on the Meltzer Commission, I often saw his sincere empathy for the plight of others, and his frequent references to the effects of policy on the lives of ordinary people. He is consistently reminding us that the failure to apply simple time-honored policy truths delays progress in reducing poverty and hardship for most of the human race. His ability to maintain his spirit and humor as chair of that commission taught me that Meltzerism is ultimately an optimistic and extremely patient intellectual movement grounded in a faith in human reason to overcome the bad thinking, perverse incentives, and self-interested politics that stand in the way of a wealthier and more stable global economy. Allan said to me: "Our job is not to succeed necessarily. Our job is to make efforts that produce information and thought that could be used later, once a political opportunity opens the way for real reform." That is what patience is all about.
Carnegie Mellon University
It is a great privilege to be here to honor Allan. Having been raised in the Princeton and MIT tradition of economics, we were told that he was the leader of a group of armed and dangerous extremists who had seized control of the Federal Reserve Bank of St. Louis. Little did I know that twenty years later I would be branded as a coconspirator. Allan’s thinking always comes down to one simple question: Where is the market failure? If there is no clear answer to this question, there is no role for government. Allan believes that, in general, if incentives are aligned correctly, markets function well, intervention is seldom required, and the cure is frequently worse than the disease.
In the Meltzer Commission Report, Allan applied this simple concept to the two core subjects: financial crisis resolution and development aid. Throughout the 1994 to 2001 period, financial crises in emerging economies were increasingly frequent and severe. Allan’s questioning determined a simple cause: a system where investors were guaranteed a high return without a high risk. IMF bailouts had created an atmosphere where there were no consequences for bad lending decisions. Two-thirds of World Bank projects in developing countries failed to yield benefits that exceeded costs over any time period in the last twenty years. Countries had also accumulated debt they could never hope to repay. What is the solution? Restrict the IMF to a pure lender of last resort role that prevents panic, allows markets to function, but does not forestall default and losses. Change the delivery of aid from loans to performance based grants so that you only pay for results. The Bush administration has been the perfect aid in advancing these reforms, paying only for results, minimizing debt for people who cannot pay, and encouraging reform with incentives. Allan’s work has been instrumental in getting these ideas, once rejected by the mainstream, accepted and slowly applied.
Panel III: Political Economy
As a colleague of this intellectual impresario at Carnegie-Mellon for sixteen years I witnessed the important role that Allan played in the development of the modern positive political economy, a strain that runs through all of his writings. This way of thinking about government accounts for incentives on individual and collective behaviors that actually resemble the way real governments and real people work. Allan brought together many disparate elements at Carnegie Mellon and helped to spread these ideas throughout the intellectual community.
Allan is my mentor, my coauthor, and my friend, and I could not have chosen better in any one of those dimensions. Soon after meeting him, I quickly learned three of his trademark expressions: "You’ll learn!", "Don’t bet on it!", and "Oh yeah, how do you know that?" To honor the man, I would like to honor his ideas by reviewing a paper we wrote together, published in the Journal of Political Economy in 1981. The paper was called "A Rational Theory on the Size of Government." It investigated the demand for wealth redistribution. Our paper was an attempt to explain why the government did not take all of a nation’s wealth as it continued to grow. We modeled a labor economy with differing individual productivities, a linear income tax, and lump sum redistribution. We found that redistribution increases as average real income rises, and that the median voter (who sets the tax rate) did not have the average income, but instead saw that the average income was above his. The size of government is determined by not only how wealthy the country is but how skewed the income distribution is.
We tested our findings empirically, using all state, local, and federal government spending in the U.S. from 1937-40 and 1946-76. We found that throughout the century, as a share of GDP, government spending on public goods has remained constant, and that most of the growth in government has come from public supply of private goods and redistribution.
My collaboration with Professor Meltzer has been both fruitful and exciting, and to some extent the things being said here are also a tribute to the intellectual legacy and enthusiasm of Karl Brunner. The Meltzer-Richard model has had a lot of influence on the subsequent development of the so-called new political economy since the end of the 1970s, and for me it was the first time that I saw a model that had, explicitly and clearly, an interaction between economic behavior and political behavior. This methodology has subsequently been applied to tariffs, progressive income taxation, political understanding of government and deficits, intergenerational redistribution, and the political economy of labor market decisions. This approach, pioneered by Allan, is now largely the standard.
Allan H. Meltzer
AEI and Carnegie Mellon
Many people have influenced me, none more so than Karl Brunner in our many years of collaboration. Our work has not been about ideology, but about the analysis of ideas. Herb Simon taught me that you do not want to look in the literature to see what people are talking about; you want to look in the world to see what is going on. I saw economics as a policy science. I had an understanding and patient wife who was generous in spirit and who complained very infrequently about how much time I spent working. I have loved being an academic with the variety and independence you get. And I have had great coauthors who were kind enough to come today to say such kind things: Karl Brunner, Scott Richard, Alex Cukierman, Charlie Calomiris, Adam Lerrick, and Anna Schwartz. Academic life has been unusual in many ways. You get the independence to do what you want; you get sharp, pointed criticism, but after a while you realize that most of the critics are telling you something that might be useful if you have thick enough skin to live through the barbs that come with the criticism. These honors really belong to a much wider group of people who have worked with me and it has been a wonderful experience being with them. Thank you all very much for participating today.
AEI research assistant Jonathan Lieber prepared this summary.