The Reaper Cometh!


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The IMF released their latest ‘World Economic Outlook’ (WEO) last week. The WEO is a twice yearly publication in which IMF economists try to predict near and medium term economic developments – the WEO also, quite notably, failed to see exploding house-prices in certain advanced economies as the hazardous bubble which, of course, it turned out to be. Perhaps such obvious oversight disqualifies the current WEO any serious consideration from the outset, but… actually, I’m not going to add a ‘but’ to that statement, there’s every chance that this oversight does disqualify the current WEO from serious consideration. But let’s give them a run for their money – why not? I saw a few plastic Christmas trees in the foyer of a shopping center today which temporarily took my mind off the ‘To Let’ signs that I have become so accustomed to. So, in the festive spirit I offer the IMF my gift, er, this Christmas.

The rest of this article is indebted to (that is: nicked from) this wonderful paper by Mark Weisbrot and Juan Montecino over at CEPR.

So, those notorious optimists at the IMF must be locking up the happy pills these days, because they now predict that world economic growth is set to slowdown from a modest 4.8% in 2010 to a dismal 4.2% in 2011. They attribute this – and I quote – to “low consumer confidence and reduced household income”… shock! People have less money than before! And they’re buying less crap! Thank the Good Lord for IMF reports, eh? Otherwise we’d all be in the dark.

Yet, despite all this, the IMF still seems to be pushing the fiscally austere credo. Weisbrot and Montecino point out that in 2008/09 31 out of 41 IMF patron countries were pursuing what they refer to – rather innocuously – as ‘pro-fiscal or monetary policy’. That’s neo-liberal policy to you and me.

The authors sum this policy up as:

“[A]ttempting to recover [from the crisis] by means of an internal devaluation.”

Plain English: kicking the domestic economy back into the early 19th century. Or:

“This means that the economy must contract and unemployment must rise sufficiently in order to push down wages and other costs to the point where there is a significant real devaluation, while keeping the nominal exchange rate fixed.”

What the authors mean by ‘real devaluation’ is, well, let’s leave it up to the wonders of the English language to sort this out.

Devaluation: -noun “a reduction of a value, status, etc.”

Now replace the word ‘real’ with the word ‘employee’, ‘worker’ or ‘citizen’ and you’ll get a fair idea of what’s going on here. Yes, that’s right. Devaluation is coming – to your pay-check, to your health care system, to your social welfare payment.

The idea is well-known – but little elaborated. Cut, cut, cut – grow, grow, grow. Is this economics? Or gardening? Frankly, I don’t know what it is anymore – but, hey, it’s popular.

Anyway, Weisbrot and Montecino don’t buy it. They claim that these policies are going to cave in on themselves. If the economies are, in the IMF’s own words, suffering from “low consumer confidence and reduced household income” then surely the problem is effective demand? And if effective demand isn’t bolstered by increased government spending then surely people will buy less stuff, more businesses will close and more ‘To Let’ signs will spring up in the shopping-center foyers – ruining my Christmas spirit and encouraging me to slag off IMF papers rather than engaging with them!

Take the previous IMF predictions on the Irish economy. As the authors say:

“Although Ireland had positive growth for the first half of 2010, the IMF projects negative 0.3 percent growth for the year. For 2011, the IMF projects growth of 2.3 percent, but this is difficult to believe given the massive fiscal consolidation taking place. It is worth noting that when Ireland began its budget cuts at the end of 2008, the IMF projected 1 percent growth for 2009; the actual result was negative 10 percent.”

Woah! -10% rather than +1%! Something stinks all right and I think that it might be the IMF’s rotten economic ideology!

The problem – as I’ve said before – is a mixture of the dilapidated state of consumer spending within national economies together with the resultant decline in imports from foreign markets. People inside the borders aren’t spending enough – and, consequently, those abroad aren’t buying enough. As I’ve pointed out before, this is particularly problematic for Ireland – being at once ruined in terms of domestic demand and heavily reliant on shrinking international exports.

The solution? Being rather tired of my own voice at this point – and sick of typing – I offer the authors’ sagely advice:

“[I]t would be possible to finance a fiscal stimulus without adding to net debt, if the European Central Bank were to agree to such a program. This is true for the entire Eurozone, and for the United States – which together with the Eurozone and Japan, makes up more than half of the global economy.”

But we in Ireland haven’t been offered this option by our brothers in the EU. Instead, we stare down the dark barrel of IMF austerity.

The reaper cometh!


2 Responses

  1. Pope Epopt

    October 24, 2010 9:52 pm

    Yep, the ESRI forecasts of 2% in year whatever (“growth – coming to an economy near you!…”) seem like they are using a cousin of the IMF’s model – absolutely unfit for purpose.

    I struggle to understand the reasoning behind the fiscal tightening policy drive, even from an economic elite point of view. But you said it – capitalists are interested in power as well as money. They distrust the state, despite having pretty effective control over it, and want to take more of its assets into their hands. A great deal of privatisation is worth some short-term fall in profit making, I guess.

    Perhaps they have realised that growth is over in the shortish/medium term, due to energy and resource constraints, and now is the time to grab what they can. Kind of Mad Max fuel dump economics, writ large.

  2. Philip Pilkington

    October 24, 2010 10:05 pm

    @Pope Epopt

    I’m sticking to my guns – or rather, Michal Kalecki’s guns (sigh, the anxiety of influence…) – here. Businesspersons may exert considerable influence over the political system, but this is indirect.

    We must, in these instances, think, as the Marxians say, without ‘abstractions’. Concretely speaking when a businessperson acts day-to-day they enjoy the influence which they wield in their field. If the state steps in to help, then suddenly they find themselves subordinate to some bureaucrat or some politician. That’s why they ain’t happy about the whole thing. That’s why you hear them railing against any sort of regulation.

    Frankly, I don’t blame them – if I were in their position, read the same newspaper columns as them and, perhaps, was a little dimmer, I too wouldn’t really want ‘the Man’ telling me what to do…