What’s the IMF’s Point?
12:00 AM, Apr 20, 2013 • By IRWIN M. STELZER
They come, they meet, they confer, they dash from television studio to television studio. Whether all of this to-do at the meetings here of the International Monetary Fund and the World Bank signify anything very much in the world outside of policymakers’ conference rooms is unclear. The IMF did get attention when it lowered its forecast of world growth this year from 3.5 percent to 3.3 percent, a testimonial to the faith of the Fund’s economists in the precision of their forecasts. These forecasters now think that the U.S., UK and China will grow more slowly than they anticipated only a few months ago; that the eurozone will have a more pronounced slowdown; and that Japan will awaken from a decades-long slumber as the new head of the Bank of Japan cranks up the printing presses to speeds that make the Federal Reserve Board’s Ben Bernanke look like a hard-money advocate.
Here is a summary of the IMF’s 2013 revisions and its forecasts for 2014.
Original New 2014
U.S. 2.1% 1.9% 3.0%
UK 1.0% 0.7% 1.5%
China 8.1% 8.0% 8.2%
Eurozone -0.1% -0.3% 1.1%
Japan 1.2% 1.6% 1.4%
World 3.5% 3.3% 4.0%
More revisions to follow when the IMF rethinks its most recent rethink.
More important are the policy debates that bubbled up at the meetings and seminars held around Washington this past week. Christine Lagarde, managing director of the IMF, applauded Japan for adopting a policy of quantitative easing twice the size of America’s, relative to the size of its economy -- “a welcome step” in support of world growth. Odd, that, since when the IMF moves beyond its managing directors’ speeches appealing for a relaxation of austerity to real world situations such as those in the eurozone, it always signs on to severe austerity programs. There are millions in Greece, Spain and elsewhere who prefer the Lagarde of the speech circuit to the Lagarde of the bailout deal.
Lagarde’s talk in the run-up to and during the meetings puts the IMF on the side not only of prime minister Shinzo Abe and the new head of the Bank of Japan, Haruhiko Kuroda, but of Barack Obama, who sent Jack Lew, his new treasury secretary to Europe to preach the need for expansionary monetary and fiscal policies to stimulate growth. Lew won no converts from faith in austerity.
Lagarde’s attacks on proponents of austerity line her up against German chancellor Angela Merkel and Britain’s chancellor of the exchequer George Osborne, who believe that austerity is the route to sustainable economic growth in their countries. The disagreement between Lagarde and Merkel is not the first, and will not be the last dispute between French and German politicians over what policy is best for the future of Europe.
The differences between proponents of austerity and of expansionary monetary policy are about the here and now, not the long run. Even those who favor loose monetary and fiscal policy hold these out as temporary measures: once the economies are growing again, budgets should be brought into balance, or nearly so, and central banks should sell off the assets they have taken on their balance sheets, thereby reducing the money supply. It is the ability of politicians to give up the pleasure of spending money they do not have, and of central bankers to put quantitative easing into reverse -- QE is a big vessel, not easily turned around -- that austerity fans doubt. They fear that central banks will not start winding down their bond purchases in time to head of an inflationary spurt that would drive up interest rates, with disastrous consequences for the cost of serving sovereign debt.
Fortunately, this debate is not of great consequence in the world outside the hallowed halls of the IMF. Britain’s chancellor of the exchequer is not going to reverse course because Ms. Lagarde thinks he should, and Ms. Merkel is not going to unbalance the German budget and liberate Mario Draghi, the head of the European Central Bank, to join his Japanese, American, and other central-banker counterparts as they toil over their printing presses simply because Christine Lagarde thinks Draghi should. Countries that need IMF help in procuring bailouts might treat the Fund’s views with deference, the choice being default and ejection from euroland, but other nations will not.
Which might not be a bad thing. Every nation has different political, cultural, and economic needs: as with the euro, one size does not fit all.
· Japan, the victim of decades of stagnation as consumers and businesses postponed spending because deflation would make things cheaper tomorrow, and tomorrow, and all their tomorrows after that, needs to break those deflationary expectations by flooding the country with cash to create expectations of inflation -- buy now or pay more later might persuade consumers to spend some of the $8.8 trillion they have salted away in anticipation of lower prices in the future.
· Germany has an entirely different problem from that faced by BoJ boss Kuroda. Its history makes its voters dubious of the advantages of a Japanese-style inflationary policy. Besides, Ms. Merkel presides over a eurozone desperately in need of reforming its labor markets, its education systems, and it banking sector, among other things. An infusion of easy cash would enable reluctant politicians to postpone these reforms by burying their structural problems under a pile of paper money. Not forever, but for long enough to permit voluntary rather than forced retirement from public life -- which is why kicking the can down the word has become the game of choice of many serving politicians.
· In the UK, George Osborne has still a different problem -- moving the boundary line between the state and private sectors to bring his country’s welfare state down to a size Britain can afford. Rather than declaring that his goal is to shrink the welfare state, and frightening benefit recipients, among them many middle-class Tory voters, Osborne prefers to sail under the more appealing banner of austerity -- living with the nation’s means, preserving its credit standing.
The willingness of Ms. Merkel and Mr. Osborne to give greater weight to the circumstances of their countries’ economies, is perhaps compounded by the fact that the IMF says one thing and does another when faced with real world problems in the eurozone. No matter the reason, unless a country is in need of a bailout, IMF general policy preachments are of less relevance than the circumstances of individual countries.
Add the uncertain empirical underpinnings of such preachments. Like many others, including top policymakers here in the U.S., Paul Ryan being the most recent and notable, this writer has relied on a study by Harvard University’s Kenneth Rogoff and Carmen Reinhart for the proposition that when public debt exceeds 90 percent of GDP, growth turns negative. But a group of researchers at the University of Massachusetts now find that such a debt burden is associated with positive growth of 2.2 percent. Rogoff and Reinhart, they say, committed “coding errors,” selectively excluded “available data,” and made other “serious errors that inaccurately represent the relationship between public debt and GDP growth.” Another policy pillar collapses.
So when next the IMF or any organization of any pundit, present company include, offers an over-arching, empirically based policy solution to the world’s ills, do reach for a pinch of salt.
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