Home > The Economics Profession > Is Advice from the IMF Better than Advice from a Drunk in the Street?

Is Advice from the IMF Better than Advice from a Drunk in the Street?

from Dean Baker

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 health care, 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 United States 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 buildup 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 towards 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. At least a street drunk giving economic advice would be honest.  

See article on original website

  1. June 29, 2010 at 11:27 pm

    Pretty good article overall, yet I find Dean’s indiscriminate use of the term “wealth” somewhat troubling. I may of course be reading him wrong, but since when does asset inflation equate to wealth creation? Was there really a _loss_ of wealth, or would fictitious wealth be a better description of what had been accumulated during the bubble? Taxonomy is of the essence to “real” economists, isn’t it? I guess what I’m asking for is some clearly stated assumptions. Is wealth a self-evident truth, or is its meaning based on something more fundamental? If we want to get to the bottom of solving the current crisis, logic seems to me indispensable; and so far, Dean’s attempts fall just a bit short in my view.

  2. Alice
    July 1, 2010 at 8:28 am

    No – the advice from the IMF is worse than asking a drunk in the street. The IMF has caused more problems than it has solved through its over judious use of debt finance, stripping of public services in many developing nations, keeping the bankers and other miscellaneous loan sharks happy with their high interest rates on borrowed funds from impoverished nations.

    Am I angry? Oh no…just mildly. Keynes told the IMF how to fund the fund for impoverished nations to help global poverty some 60 years ago. So now, because the global banks didnt want to hear about the only real solution possible (a tax on surplus nations to to “given” not “lent” to poverty stricken nations…..and then they threatened Keynes with expulsion from Bretton Woods over it…and they won and the IMF has been running on this faulty prescription of fiscal austerity, privatisation and debt “as a bailout” every since…

    The banks won. Economics and economic welfare lost. Has anything ever really changed?? And nothing ever will….the IMF is the bagman for global banks.

  3. Alice
    July 1, 2010 at 8:31 am

    The IMF is an abject failure at its vey “raison d’etre”. I would argue strongly the IMF has been hijacked to vested interests and is now entirely divorced from its original purpose (to fight global poverty) and therefore it should be immediately disbanded.

  4. Ricardo Coelho
    July 2, 2010 at 10:50 pm

    It seems like central banks and governments are using their political power to prolong the crisis, as this allows companies to lower wages and reduce job security, Of course, this strategy has its costs but it seems that these guys are willing to pay the costs.
    Conspiracy theory? I don’t think so, for me this is the only explanation for the collective madness we’re experiencing.

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