Yesterday in Washington, the IMF held a web press conference to announce the release of its April 2013 World Economic Outlook. The transcript of the event is here. The Wall Street Journal report is here.
Could there possibly be a more destructive force in world economic policy than the IMF? Tell me I'm wrong, but I assert that their main purpose in life is to promote economic fallacy in the effort to provide legitimacy to big governments and high government spending around the world. The principal tool in their arsenal right now is the use of terms like "austerity," "stimulus," and "fiscal consolidation" as descriptors of the main alternatives in economic policy. These terms are hugely misleading and lead to precisely the wrong result every time.
For those new to the Manhattan Contrarian, here is my view of the basic issue:
Here is really everything you need to know about economic policy: large private sector, small state sector, successful economy; small private sector, large state sector, unsuccessful economy.
The IMF's Keynes-based terminology entirely muddles the relevant concepts to make the bad policies appear marginally superior to a fake straw man, thus to support larger government. What is "austerity," sometimes also known as "fiscal consolidation"? It is some combination of cuts to government spending -- good policy -- with tax increases -- bad policy. Since the tax increases almost always exceed the cuts to spending, the combination represented by "austerity" is very likely to be a negative. The IMF uses that fact to make a fallacious argument in favor of bad policy -- increased government spending -- over good policy -- cuts to government spending.
Don't believe me? Here they are yesterday. According to the WSJ report:
Seeking to keep a fragile global recovery on track, the International Monetary Fund on Tuesday called on countries that can afford it—including the U.S. and Britain—to slow the pace of their austerity measures. The fund warned that "overly strong" belt-tightening in the U.S. will slow growth this year. Across-the-board government spending cuts, known as the sequester, were the "wrong way" to shrink the budget deficit, it said in its semiannual report on economic growth.
Or check out a few choice quotes from the IMF's Chief Economist, M. Olivier Blanchard (that's Blahn-SHAR -- he's a frog):
The growth figure for the United States for 2013 may not seem that high. Indeed, it is insufficient to make a large dent in a still very high unemployment rate, but it comes in the face of very strong, indeed an overly strong, fiscal consolidation of about 1.8 percent of GDP.
"Overly strong fiscal consolidation" = "Don't you dare try to cut government spending!" They will never, ever admit that tax increases are the problem and cuts to government spending are the solution. In fact, it is a required feature of their style manual that they must never, ever use any term that breaks "austerity" or "fiscal consolidation" down into the two components parts of government spending cuts on the one hand and increased taxes on the other. Here is Blanchard's comparable remark as to France:
France's growth is forecast to be slightly negative in 2013, reflecting a combination of fiscal consolidation, poor export performance, and increasingly, so, low confidence.
I like that "growth slightly negative" bit -- are they allowed to use the word "shrinkage"? Now what exactly does so-called "fiscal consolidation" look like in France? Can they mention that spending by the French government is a stunning 56% of GDP? Possibly, could that be part of the problem? (Federal/State/Local combined spending in the U.S. is around 40% +/- of GDP.) Are they actually planning to shrink the 56% even by a little? Time here describes the proposed fiscal plan of the Hollande government as "combin[ing] cuts [with] targeted stimulus spending and increased taxes." So on the spending side it's just a complete bait and switch -- some goes down and some goes up, and the government never shrinks by one iota. And can they even breathe a word that the threatened 75% tax rate on high earners might have something to do with the problem?
We can never be reminded too often that when the policy of massive spending cuts without tax increases has been tried, it has set off an economic boom. If you have not read Dave Henderson's Hoover Institution piece on the post-World War II spending cuts (well over 50%) in the U.S. and ensuing boom, you must. And don't forget the classic 1943 quote from delusional uber-Keynesianist Paul Samuelson:
The final conclusion to be drawn from our experience at the end of the last war is inescapable—were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties—then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.
All those government actions he warned against ("wind up our war effort in the greatest haste, demobilize our armed forces, . . . liquidate price controls, . . . shift from astronomical deficits to even the large deficits of the thirties") actually happened, except of course for the deficits part -- they actually went to surplus in 1947, 1948 and 1949. But of course, the "greatest period of unemployment and industrial dislocation which any economy has ever faced" didn't happen at all. Instead, there was a boom. Oh, and Samuelson went on to make millions selling his Keynesian claptrap textbook to a couple of generations of credulous college students.
You really can't trust a single word that the so-called "experts" say on these subjects.