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Home Publications Blogs Beat the Press The IMF Has "a long history of stabilizing economies and solving global financial problems"?

The IMF Has "a long history of stabilizing economies and solving global financial problems"?

Saturday, 24 April 2010 06:01

That's what the Washington Post told readers this morning. This claim would news to hundreds of millions of people around the developing world. Back in the 90s the IMF came to be known as the "Typhoid Mary" of emerging markets as its policy prescriptions led to sharp economic downturns in one country after another. It tried to impose a harsh austerity plan on Argentina in 2001 and did everything it could to sabotage its economy when the country refused to go along. Its sabotage effort included economic growth projections that were likely politically motivated, since they consistently under-projected growth. This would have the effect of scaring away potential efforts. By contrast, the IMF consistently over-projected Argentina's growth in the years when it was following policies recommended by the IMF.

The theme of the article is that people in wealthy countries will have to accept lower living standards, as indicated by its headline: "for nations living good life, the party is over, IMF says." Of course, nations don't live the good life, individuals within nations do. In the United States, and to a lesser extent, most other wealthy countries, the last three decades have been marked by an upward redistribution of income. This has led to a situation in which most of the gains from growth have gone to those at the top end of the income distribution. This would suggest policies that focused on cutting back on their good life, for example a financial transaction tax or the financial activities tax (FAT) that was proposed by the IMF last week. This would cutback on the high incomes of Wall Street's "top performers" while leaving most of the rest of the country largely unaffected.

The distributional issue is also important in the context of one of the other policies highlighted by the IMF: reducing the value of the dollar against the yuan and other currencies. This will raise the price of imports and in that way lower living standards in aggregate. However, by making U.S. manufacturing more competitive, it will increase the demand for manufacturing workers, allowing many workers without college degrees to get relatively high-paying jobs. This is likely to lead to an improvement in living standards even if these workers have to pay somewhat more for imported goods. (Imagine a worker can get paid $20 in auto factory instead of $10 working in a convenience store. They will be much better off even if they have topay 20 percent more for their clothes, shoes, and toys.)

Finally, this article includes an assertion that the United States might need: "roughly $1.4 trillion annually, to be cut from government programs or raised through new taxes." There is no remotely plausible story that would give a number even half this large. This is the size of the government's current budget deficit. More than half of this shortfall is attributable to the fact that the economy is operating well below full employment. If the country were at normal levels of output, the current deficit would be less than 5 percent of GDP.

And, there is no reason that the country must balance its budget. Deficits equal to 2-3 percent of GDP are consistent with a stable or declining debt to GDP ratio. This means that the adjustment needed to get the budget on a stable fiscal footing are likely less than one-quarter of what is implied by this Post article. Furthermore, much of this gap can be made up simply by allowing freer trade in medical services.

Comments (8)Add Comment
..., Low-rated comment [Show]
written by skeptonomist, April 24, 2010 9:16
"The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States."
[Ch. 12]
written by Queen of Sheba, April 24, 2010 4:18
For the past fifteen years or so I have been reading horror stories about what happens to a country's citizens and its commonweal when the government decides to accept the terms and conditions imposed when borrowing from the IMF. So I was floored when I read last week that the IMF was proposing that the U.S. institute a financial transaction tax, as well as reducing the value of the dollar - both of which I agree with.

As for the drastic reductions in spending they propose, here I smell a rat. I do not trust congress to cut much of anything but spending on social services - certainly no appreciable amount from the gluttonous DOD - especially when commissions peopled by millionaires and billionaires have been given the task of identifying budget cuts and proposing the enacting legislation (which congress must accept with no amendments). Insisting on saving federal money by "revamping" Social Security and "reorganizing" Medicare and Medicaid, but leaving in place the operating theory of trickle-down economics and a corrupt compensation system for the players on Wall Street, is entirely unacceptable.
written by mmckinl, April 24, 2010 7:55
Read John Perkins book: "I was an economic hitman."

The IMF is the arm of neoliberalism that cascades a country into chaos whereby multi national corporations can come in and set their own usurious terms and conditions on a country.
John Kenneth Galbraith’s definition of a newspaper columnist
written by Scott ffolliott, April 24, 2010 8:31
"It brings to mind John Kenneth Galbraith’s definition of a newspaper columnist as a person obliged to find significance three times a week in events of absolutely no consequence."
Ahh, THE point !
written by Larry Signor, April 24, 2010 9:20
Your point with the Post is well taken. This seems like verbatim coverage of an IMF economists report. Sloppy, alarmist and misleading. Whether you like WaPo's politics or not, this was high school journalism. The IMF is a counter-cyclical, doomsday tweet. Mass worldwide un-employment and the best this ignorant bunch of elitists can suggest is for humans to work more and longer? For this advice I have a grandfather.
http://www.washingtonpost.com/...0042306038The IMF is studying issues...to make "consolidation" as painless as possible. But it views a longer working life as an important tool.

Let's start with the IMF economists, who can retire to a picturesque Kentucky coal mine town and begin an "longer" work life.
written by purple, April 25, 2010 3:07
Until we asphyxiate the rentier class, these problems will continue. Keynes' idea, not mine.
For "izzatzo"
written by William Conservative Williams, April 26, 2010 6:58
This Is Just To Say

I have consumed
the funds
that were in
your account

and which
you were probably
for retirement

Forgive me
market discipline
so sweet (for me)
and so cold (for you)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.