The International Monetary Fund’s World Economic Outlook in Theory and Practice

October 10, 2017
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Mark Weisbrot
HuffPost, October 10, 2017

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The International Monetary Fund (IMF) released its biannual “World Economic Outlook” (WEO) today, presenting a 300-page overview of the world economy and where it might be going. The Fund is one of the most powerful and influential financial institutions in the world. Despite the fact that this flagship publication, and the Fund’s hundreds of PhD economists, missed the two biggest asset bubbles in US and world history (the stock market bubble in the late 1990s and the housing bubble that triggered the Great Recession), the WEO is taken very seriously and contains much valuable data and analysis.

The fall WEO is relatively upbeat for the world economy in the short run but is more worried about downside risks in the medium term. It lists a number of concerns that anyone who cares about social or economic justice, or progress, would be concerned with, such as:

the recent surprisingly slow growth of nominal wages, which reinforces a longer trend of stagnant median wages, rising income inequality, and job polarization such that middle-skill but well-paying jobs have become increasingly scarce.

And the Fund argues that “governments should also consider correcting distortions that may have reduced workers’ bargaining power excessively” and “promote an environment conducive to sustainable real wage growth” as well as

further improving financial regulation, enhancing the global financial safety net, reducing international tax avoidance, fighting famine and infectious diseases, mitigating greenhouse gas emissions before they create more irreversible damage, and helping poorer countries, which are not themselves substantial emitters, adapt to climate change.

This is all very good but how are governments to accomplish most of these things, even in the high-income countries like the United States and in Europe? The two main policies that governments have at their disposal are monetary policy (control over interest rates and the money supply) and fiscal policy (taxing and spending).

On monetary policy, the IMF recognizes that inflation in many high-income countries (currently averaging 1.7 percent) is persistently below target and that this is a problem; and that monetary policy should remain “accommodative” for now. This should include the US, where the Fed’s preferred measure of inflation was 1.4 percent for the year in August, well below its target of 2 percent.

But the IMF appears to support the US Federal Reserve’s “normalization” of interest rates, i.e., continuing to raise short-term interest rates, with a forecast increase of 0.75 percent over the next year. But when the Fed raises interest rates it slows the rate of job creation, thus leaving more people out of work. This also reduces the rate of wage growth, and increases inequality as lower-income workers are harder hit (including African-Americans who have about twice the unemployment rate of whites). What is the excuse for raising interest rates in the US when inflation is below target? The IMF doesn’t tell us.

In its report, the Fund also details the risks to developing countries from the Fed raising interest rates, as this can cause crises when capital moves away from them to the US and high-income countries. But low- and middle-income countries have very little voice in the 189-country organization; it is run by the US and its high-income country allies. This is the biggest problem with the IMF, since many developing countries have been subject to harmful policy conditions when they borrow from the IMF.

The Fund’s progress on monetary policy over the past decade has been substantial, especially since the Federal Reserve broke new ground in December of 2008 with quantitative easing, or using money creation to lower long-term interest rates; not to mention lowering short-term rates to about zero in December of 2007 and keeping them there for seven years. The European Central Bank followed with quantitative easing in March of 2015.

The IMF’s biggest weakness is on fiscal policy, where new spending is needed to reduce mass unemployment in Europe, make the investments needed to reduce climate change, and fix most of the other problems that the IMF professes to care about in this document. Currently, in the US and Europe, governments can borrow for 10 years at a real (inflation-adjusted) interest rate that is zero or negative, so now is a very good time to do that. But the IMF doesn’t see it that way.

“Fiscal policy should be aligned with structural reform efforts, taking advantage of favorable cyclical conditions to place public debt on a sustainable path while supporting demand where still needed and feasible.” Translation: most governments should cut spending and tighten budgets so as to reduce public debt; there may be some who can afford to not do this but they will be rare. And the “structural reforms” that the IMF is supporting in practice include changing labor laws to reduce the bargaining power of workers, cutting health care and pension spending, and reducing government employment.

The IMF expresses concerns about an “anti-globalization backlash” but in Europe, for example, the rise of the far right and anti-immigrant political movements is clearly related to the policies that it has supported there since the world financial crisis and recession. In Spain, for example, the IMF now defines 16 percent unemployment ― which Spain is projected to reach in 2019 (it’s now at 18 percent) as basically full employment, since their projections show that the economy will be operating at its potential output. In France, the IMF currently supports more budget tightening despite 9.5 percent unemployment, as well as unpopular legal changes that will weaken organized labor.

The changes in the IMF’s research department that have led to its statements and empirical work on inequality, wage stagnation, climate change, and other important economic and social problems have been significant in recent years. But the Fund’s recommended policies ― which have much more impact ― have lagged far behind.

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