Ricardo Reis was too frank for the IMF

SOME BRILLIANT minds have served as chief economist of the IMF. Several of the sharp thinkers were also blunt talkers. Michael Mussa, who held the job from 1991 to 2001, was once accused of being a hired gun. “At least I hit what I aim at” he fired back.

The prestigious position might have been awarded this summer to Ricardo Reis of the London School of Economics. But his occasionally blunt media comments reportedly cost him the job. According to the Financial Times, the offending remarks included some orthodox criticisms of President Donald Trump’s tariffs, which he said would raise prices and reduce efficiency. In response, the IMF “categorically” denied that “any candidate was disqualified because of their academic views on the detrimental impact of tariffs…It is not credible to suggest we would object to views that our own research has confirmed and publicised.”

Tariffs are not, however, the only targets Mr Reis has hit. In his column for Expresso, a Portuguese newspaper, he once described Mr Trump as a “protofascist”, albeit institutionally constrained. He later suggested that the president likes tariffs partly because of the exemptions he can grant. “Anyone who wants to pay less has to convince Trump with flattery, business deals with his family, gifts…For someone who sees the presidency as a way to enrich himself personally, or even simply to be flattered, tariffs are an excellent tool.” Last year a column entitled “Gringos on the pampas” marvelled at the Trump administration’s willingness to lend to Argentina. The Peronist left, which could reclaim power at the next election, “proudly never pay what they owe”, he wrote.

As an academic, he is entitled to such views. But as an IMF appointee, they might have caused a fuss. America, after all, is the fund’s biggest shareholder; Argentina its biggest borrower.

Mr Reis will not, then, go to Washington, where he would have formed a dynamic Bretton Woods duo with Michael Kremer, a Nobel-prizewinner nominated this week to be chief economist of the World Bank. His influence will instead remain indirect and intellectual. His research sheds light on several of the fund’s preoccupations, such as fiscal limits, the monetary mystique of central banks and the network of currency swap lines between them.

His theory of fiscal limits builds on previous work by Olivier Blanchard, one of those brilliant IMF alumni. Mr Blanchard pointed out that the interest rate in many economies has often settled below its growth rate, defying textbook logic. That allows governments to spend their way out of economic setbacks like the covid-19 pandemic, then grow their way out of the resulting debt.

But “the” interest rate needs unpacking. The price paid to capital takes many forms. Even when yields on government bonds lie below the growth rate, the marginal product of capital—the return to accumulating productive assets, like machinery and equipment—typically lies above it. The relatively high return to physical capital suggests that some potentially lucrative ventures are starved of money, perhaps because investors prefer the safety and liquidity of government securities. Indeed, in Mr Reis’s model, the appeal of sovereign debt is stronger when the financial system does a bad job of funding and insuring entrepreneurial endeavours. In such countries, governments borrow cheaply, fiscal limits bind loosely but the economy fares poorly.

Mr Reis has also tried to clarify the financial limits faced by central banks, despite their power to create money. Their “fascinating” liabilities comprise banknotes, which pay no interest, and deposits (called reserves) held on behalf of lenders. These liabilities cannot be converted into anything other than themselves. As such central banks cannot go bust like other banks can.

They nonetheless face constraints. They are obliged to convert banknotes into reserves at par, and vice versa. So they cannot directly control the mix of their liabilities. Nor can they force people to hold on to their money or stop people raising the cost of things they price in it. Mr Reis and his co-authors have estimated the market value of the Federal Reserve’s power of “seigniorage” (acquiring remunerative financial assets funded by zero-yielding money). They find it is typically worth less than 30% of GDP. If central banks push too far, they will unleash inflation and eventually hyperinflation. That can end with the debased currency being scrapped—the central-bank equivalent of going bust.

In today’s globalised economy, banks often borrow in international currencies that their home central banks cannot create. If these borrowers run temporarily short of dollars, say, their home central bank may not be able to fulfil its role of lender of last resort. The Fed has responded by offering to swap dollars with the currencies of other trusted central banks. The Fed then leaves it to them to decide where the dollars should go, and on what terms.

The IMF does not have the Fed’s bottomless pockets. But it does have broader know-how and reach. Mr Reis thinks it could offer to underwrite and police swap lines from the Fed to other responsible economies, outside the Fed’s habitual orbit. The gringos need not wander onto the pampas by themselves.

Impolitic philosophy and economics

In assessing and advising countries, the IMF must sometimes be blunt. It is often urged to embrace “ruthless truth-telling”, as John Maynard Keynes put it. But when Keynes wrote those words, he did not have the IMF in mind. He was thinking about how to engage America in the aftermath of the first world war. He recognised its inclination to “let Europe stew”. He saw Europe’s own lethargic inability to help itself. He concluded that “Attempts to humour or placate Americans…seem quite futile.” Only “violent and ruthless truth-telling” would do. The world may need such frankness again. Mr Reis, unburdened by the IMF job and the diplomatic niceties of Washington, is one of those who could provide it.■