IMF quackery

I was attempting to read the IMF staff paper (Global Economic Prospects and Policy Challenges) prepared for the recent G20 meeting in Paris and finding it difficult to comprehend.

What did it mean? I immediately thought of James Joyce’s Finnegan’s Wake; I had the same problem with that. 

Countries with high debt and facing market pressure must press ahead with “growth-friendly” consolidation now. In others, fiscal policy should navigate between the perils of undermining credibility and undercutting recovery, and facilitate a pickup in private demand. 

What the heck to make of this piece of economic advice, described as a key point? I studied and taught economics in my earlier life but couldn’t make any sense of it. No doubt Mrs Merkel and Mr Sarkozy, not to mention our Mr Swan, will be trying to puzzle it out with the help of their economic advisers. 

Presumably this IMF paper will be translated into German and French and into other G20 languages. Imagine the added circumlocutory horrors that translation will produce. “Growth friendly consolidation” or “navigating the perils of undermining credibility”, for example; exactly how would these come out? 

If you think the balance of the paper adds clarity; think again. We are told the “overarching risk is the paradox of thrift as households, firms, and governments around the world reduce demand”. The so-called paradox of thrift received rites of passage into the lexicon of economics through Keynes, though I am not sure who coined the exact phrase. It stems from Mandeville’s poem “Fable of the Bees” (1705), which describes how a prosperous vibrant community is brought to a sorry state when the inhabitants forswear all luxuries and excesses. It is an insightful concept, unfortunately, brought to ruin by a simplistic Keynesian treatment, which is rolled out periodically, as though it had meaning and application, by economic dimwits. The apparent paradox is that if we all tried to save more, production and employment would fall and savings with them. In fact there is no paradox. The mistake is in failing to understand that capitalist economies are rife with unsatisfied demands and with invention. Together, they ensure that collective saving will translate into investment provided government stays out of the way. 

Of course a society that deliberately lived a bare existence would, by definition, be impoverished and, depending upon its productivity, possibly, in a self-afflicted sense, underemployed. There may be some reclusive hair-shirted religious communities who live like this. But for the vast majority of us, bare living is not attractive; it is something to be avoided at all costs. We are softies. We prefer five star hotels to leaky tents and Lamborghinis to Shanks’s ponies. Mandeville’s fable does not apply to us in the least. Nor for the same reason does Keynesian economics. They particularly and patently do not apply just now when governments and households are heavily over-borrowed. Governments and people alike have shown no sign of wanting to live barely. In Europe rioters appear not to be objecting to extravagant living (at least to their own). 

What message is the IMF giving? On the one hand it apparently supports fiscal consolidation – effectively a euphemism for cutting government expenditure on entitlements – and, on the other, is warning about saving too much. If they were to read the IMF report (in German and French), I doubt very much whether Mrs Merkel or Mr Sarkozy would know whether they should increase or reduce taxes or increase or reduce expenditure, or when, or, of course, how to do it any of it in a “growth-friendly” way. 

The simple economic message for governments and individuals that have systematically spent more than their incomes is to cut back their spending and save more. This will not send economies into a tailspin as feared by the IMF. What will do that are more wasteful dollops of capricious government expenditure, feckless attempts to rein in budget deficits, and onerous regulations. Get rid of all three and the private sector will roar ahead. 

It is not hard to provide this kind of straightforward economic advice when not conflicted by Keynesian precepts, which get in the way of good economics. The IMF’s paper is a marvel of obscurantism. You can pretty much get anything you want out of it or nothing at all. It is worse than useless for political leaders who are struggling to reach accord on prosecuting tough policies. It provides yet another example of the damage public-sector and international-agency economists can do, and have done, for many years. Better not to be doctored at all than to be treated by quacks. Political leaders should sack their economists and simply rely on their common sense or else seek advice from economists without Keynesian baggage.

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