Is advice from the IMF better than advice from a drunk in the street? That is the question that people around the world should be asking as the International Monetary Fund dishes out its prescription for austerity. The IMF program calls for cutbacks in government support for healthcare, pensions, and a wide range of other public services. It also calls for weakening labor market regulations that provide workers with job security.
These recommendations are being given in a context where the world economy is suffering from a massive shortfall of demand. In other words, tens of millions of people are unemployed right now because there is not enough spending to keep them employed. The IMF's program is almost certain to reduce spending further leading to even larger shortfalls in demand and more unemployment.
But, the IMF says that we should trust them. The question we should all be asking is: "why?"
Where was the IMF when the housing bubble in the US and elsewhere was inflating to ever more dangerous levels? Was it frantically yelling at governments to rein in the bubbles before they burst with disastrous consequences? After all, what could possibly have been more important than warning of the dangers of these bubbles?
It was easy to both recognize the housing bubbles and that their collapse would have devastating consequences for the economy. Economies don't adjust easily to a loss of wealth that in some cases exceeded 50 percent of GDP.
Real economists know this, but apparently the folks at the IMF did not, or if they did, they didn't think it was worth saying anything. One will look in vain through IMF publications during the build-up of the housing bubble for serious warnings of the potential dangers. While the IMF can scream about the need for austerity today, it couldn't be bothered to say much about the bubbles that got us here.
The IMF's track record gives us reason not only to question the institution's competence but also its motivations. This question comes up most clearly in the case of Argentina. At the end of 2001 Argentina defaulted on its debt, enraging the IMF. Prior to the default, Argentina had been an IMF poster child eagerly embracing the IMF's program.
The IMF's growth forecasts clearly reflected its change of attitude toward Argentina. Prior to the default the IMF was consistently overly optimistic about Argentina's growth prospects, projecting much higher growth than Argentina actually experienced. After the default, the IMF was hugely over-pessimistic, projecting much lower growth rates than it subsequently experienced. It is difficult to explain this pattern of errors except by a political motivation.
It is possible to see a similar pattern in the IMF's latest set of policy recommendations to deal with the economic crisis. The impact of most of its proposals will be to reduce the benefits received by ordinary workers. The proposed changes in labor market regulations will likely also weaken workers' bargaining power, leading to cuts in wages. Furthermore, the reduction in demand caused by the turn to austerity will leave millions more out of work, both depriving these workers of income and further weakening the bargaining power of those who still have jobs.
There are alternatives. Central banks like the European Central Bank, the Bank of England, and the Federal Reserve Board could just buy and hold large amounts of government debt. These central banks can both ensure that there are no questions of solvency by providing a ready market for government debt and that there is no build-up of interest burdens. The interest paid on the debt held by the banks is refunded to governments.
Large-scale central bank purchases of government debt will not create inflation in a context of massive unemployment and excess capacity. This is not a point we have to debate. Japan's central bank has bought an amount of government debt roughly equal to its GDP, yet it remains far more concerned about deflation than inflation. While we could hope to do better on the stimulus front than Japan, inflation is simply not a problem it faces now or even on the distant horizon.
It is especially painful to see these calls from austerity coming from the IMF. This organization is distinguished not only by its dismal track record in pushing economic policies that don't work; it also is known for the exorbitant benefits that it gives its economists. Under the IMF's pension program, many staffers can retire in their early 50s with six-figure pensions. Imagine the folks who completely missed the housing bubble or who got it totally wrong on Argentina lounging around the tropics at age 51 on their $100,000 a year IMF pension. When it comes to economic advice, I think I'd rather listen to that honest street drunk.
From the Guardian.
Europeans, I think, have no concept of the ease with which an unlucky person in the U.S. can become the object of derision to be distastefully stepped around on the sidewalk, no concept of a nation where 26% of the homeless are the veterans of our wars. Only in America.
If we allow ourselves, or other nations the IMF might choose to push around, to deliver more austerity upon those who already cannot bear it, then we should be ashamed. Maybe Argentina's response was the more civilized response. Maybe it is a different test of our mettle than we understand.
But until that happens, what can you expect? You will see civil unrest and protests and threats from all those who not only didn't profit, but lost - and in addition, now face a future of unearned debt.
When a thief steals my pocketbook, you don't ask me to pay for his lawyer, so don't expect me to pay for the crimes of the thieves and "investors" on Wall Street.
In my book, they have been suspect for quite some time.
I would have kicked them to the curb a long time ago.
economy. I believe Geithner was with the I.M.F. when they suggested the no money down housing
scam, which congress aproved. Now the fox is in the henhouse.
American filmmaker Stephanie Black has a great documentary about the IMF, specifically it's role in 1970s and 1980s Jamaica. It's called 'Life+Debt' and it's part of a larger project that explores the role of the IMF in developing countries: lifeanddebt.org
The only quibble I might have is that the author does not follow through to the logical conclusion and suggest an end to issuing bonds altogether. They don't fund anything under a fiat currency, and just provide risk-free investments for rich people. In other words, government debt is just corporate welfare. We should stop selling bonds when the government spends more than it taxes.
I'm assuming that by "not issuing bonds" you are suggesting that we increase the money supply. This will hit the lowest income people the hardest, those that rent homes/apts, those that live off of fixed income (pensions, SS) and those with the "stickiest" wages. Meanwhile they rich will get richer they tend to own homes/cars/jewelery and have there wealth invested in assets protected by inflation (equities, commodities, private businesses, etc.)
Yes, I am suggesting an increase in the money supply. If you really believe that supply = prices, perhaps you would like to explain why despite there being at least 10 times more US dollars than Australian dollars they are worth roughly the same and buy a similar amount of stuff.
The decision that needs to be made is are the American people more important or are policies, procedures, and beliefs, more important?
Congress should take back the power to print money and forget about the Central Bank, FED, IMF, Wall Street, and all of the rest of the gangsters.
The bail outs should go to the American people who will then turn around and spend the money therefore stimulating the economy.
Wall Street and the big banks are not helping anyone except those that are already rich.
Let's tax the hell out of the rich and the corporations like BP and Wall Street.
Let's bring the troops home and stop spending a trillion dollars on wars.
Close some of those 700 military bases we have throughout the world in countries that are perfectly capable of defending themselves.
Lower the retirement age to 50 and open up jobs for the younger people who will pay into social security and medicare.
Put me in charge damn it! I'll show you!