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Quelle Surprise! IMF Always Prescribes the Same Austerity Hairshirt

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A new paper by Mark Weisbrot and Helene Jorgensen of CEPR have managed to unearth a dirty little secret: the IMF doesn’t just prescribe broadly similar policies in its Article IV consultations, it looks like its hands out the same medicine. We’ve used the metaphor of breaking countries on the rack, but cutting them to fit a Procrustean bed might be more apt.

Their new paper describes the scope of their review:

The IMF makes policy recommendations to European countries through its Article IV consultations and resulting papers. These are the bilateral part of the IMF’s surveillance responsibility…The IMF’s Article IV consultations provide recommendations on a broad range of issues including fiscal, monetary, and exchange rate policy; health care and pensions; labor market policy (including wages, unemployment compensation, and employment protections); and numerous other policy issues.

This paper examines the policy advice given by the IMF to European Union countries in 67 Article IV agreements for the four years 2008-2011

Part of what they found is unsurprising: the IMF loves telling client states to shrink spending and government overall, and they are particularly keen on cutting social safety nets. But their advice is even more cookie-cutter than you might anticipate (emphasis ours):

Fiscal consolidation is recommended for all 27 EU countries, and expenditure cuts are generally preferred to tax increases. In some cases there are targets or limits on public debt/GDP ratios or fiscal deficits that are below those of the Maastricht treaty. There is repeated emphasis on cutting public pensions and “increasing the efficiency” of health care expenditures. Raising the retirement age is a standard recommendation, without any correlation to a country’s life expectancy. Although slowing population growth can have important benefits (not the least of which is reduced pressure on the world’s resources and climate change), an aging population is seen throughout these agreements as a threat to the fiscal sustainability of government expenditures. This is not demonstrated through empirical evidence, for example, which might take into account productivity growth that would support a rise in the ratio of retirees to workers, while allowing for rising living standards for both, as has been the case in prior decades. There also appears to be a predilection for increasing labor supply, irrespective of unemployment or labor force participation rates. This includes such measures as reducing eligibility for disability payments or cutting unemployment compensation, as well as raising the retirement age.

Th article recaps the recent embarrassment of the IMF having to admit that it got its fiscal multipliers all wrong. If you believe austerity works, you have to think fiscal multipliers are lower than one, meaning cutting expenditures won’t shrink the economy even more than the reduction in spending. But whoops! They ‘fessed up they are typically bigger than one. But have they changed course as a result? Not really. They now simply think their clients have to be tortured a tad less savagely.

It also appears the IMF sucks at forecasting, beyond what can be explained by wanting to believe in the fiscal multipliers that justify its policy stance, rather than ones that might be a smidge more reality based. Again from Weisbrot and Jorgensen:

For example, in September 2010 the IMF projected GDP growth in Greece of -2.6 percent for 2011 and +1.1 percent for 2012. The actual results were -6.9 percent for 2011 and – 6 percent (October WEO projection) for 2012 (Weisbrot and Montecino 2012). Similarly, in Latvia the IMF projected, in January of 2009, -5 percent growth for 2009; the actual decline was 18 percent (Weisbrot and Ray 2010).

The paper also points out what other economists have mentioned about the IMF: it’s research staff does better work on this topic that its policy side appears to ignore.

The paper is accessible and useful, and I encourage you to read it in full.

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34 comments

  1. pai mei

    Everything the masters do must be viewed in corellation with peak oil. They have plans – for themselves, to maintain control and power in the post-peak oil world.

    1. from Mexico

      If peak oil is the cause, then how do you explain the 1875-1932 period, when we saw the same set of prescriptions being advocated and applied that we do now, when the world was awash in a sea of oil?

      1. from Mexico

        Another way to put this is that von Mises and Hayek were pushing their sadomasochistic personality disorder long before peak oil even became an issue, which wasn’t until the 1970s.

      2. looselyhuman

        It is and has always been simplest to understand neoliberalism/laissez faire/austrian econ/etc in terms of abject self interest.

        What’s in the interest of feudal lords and robber barons has not changed, nor will it.

      3. nonclassical

        from mexico is correct-it had nothing to do with “peak oil”…read your history;
        Naylor’s, “HOT MONEY” is best read to begin…then Shaxson’s, “Treasure Islands”, Geisst’s, “Wall $treet-A History”….all with economic historical documentation extraordinaire…

  2. from Mexico

    So the Catholic Church of the late medieval period has been resurrected as the IMF?

    The Catholic Church holds it better that the entire population of the world should die of starvation in extremist agony…than that one soul, I will not say should be lost, but should commit one single venial sin.

    – Roman theologian of the late medieval period

    This is not going to end well.

    1. F. Beard

      As usual the RCC’s ignorance of and/or arrogance toward the Bible leads it to absurd conclusions:

      Do not be excessively righteous and do not be overly wise. Why should you ruin yourself? Ecclesiastes 7:16

      Was it a venial sin when David and his men ate the showbread (it was only lawful for the priests to eat it) when they were hungry yet Christ did not condemn David’s behavior in that instance (Matthew 12:1-8)?

  3. Jim Haygood

    ‘… an aging population is seen … as a threat to the fiscal sustainability of government expenditures. This is not demonstrated through empirical evidence, for example, which might take into account productivity growth that would support a rise in the ratio of retirees to workers.’ — Marc Weisbrot

    Not demonstrated through empirical evidence? Like, four successive years of Social Security cash flow deficits (which will never reverse) isn’t ‘empirical evidence’?

    Productivity growth? An NBER paper forecasts labor productivity growth of 1.7 percent annually in coming years:

    http://www.nber.org/papers/w15834

    Raising productivity growth to say, 2.7% would be a stunning (and difficult) achievement. Meanwhile, the SocSec worker to beneficiary ratio is projected to fall from 3-to-1 to 2.2-to-1 in twenty years.

    In other words, an [unlikely] one percent boost to productivity would cumulate to a 22% gain over 20 years — not enough to compensate for the 36% heavier load of retirees imposed on each young victim … errr, worker! Worker’s Paradise, I meant to say. Arbeit macht frei …

    My advice to anyone under thirty is to move to the developing world, which is neither as deeply indebted nor as underwater on its social security schemes as the [fading fast] ‘rich’ countries.

    1. Stephen Nightingale

      The picture is a whole lot healthier if, rather than projecting productivity growth from now, we recapture the last 30 years worth of productivity growth, which were not paid in wages and will not be paid in social security to the generations who created those gains.

    2. from Mexico

      @ Jim Haygood

      1.7% productivity growth in coming years?

      Do you always cherry pick prognostications so that they fit so neatly into your ideological box?

      From 1948 through to 2009, the United States economy has grown by an average of 3.28% per year. Here’s the breakdown by president:

      1948-1952 (Harry S. Truman, Democrat), +4.82%
      1953-1960 (Dwight D. Eisenhower, Republican), +3%
      1961-1964 (John F. Kennedy / Lyndon B. Johnson, Democrat), +4.65%
      1965-1968 (Lyndon B. Johnson, Democrat), +5.05%
      1969-1972 (Richard Nixon, Republican), +3%
      1973-1976 (Richard Nixon / Gerald Ford, Republican), +2.6%
      1977-1980 (Jimmy Carter, Democrat), +3.25%
      1981-1988 (Ronald Reagan, Republican), 3.4%
      1989-1992 (George H. W. Bush, Republican), 2.17%
      1993-2000 (Bill Clinton, Democrat), 3.88%
      2001-2008 (George W. Bush, Republican), +2.09%
      http://www.davemanuel.com/2010/08/03/us-gdp-growth-by-president-1948-2009/

      We’ve managed 1.5% growth in the four years from Q1 2009 through Q4 2012.

      Will we be in recession forever? I think the only way that will come to pass is if is the austerians manage to solidify their control of the government at this critical juncture. If the austerians get firmly in control, it will be like a self-fulfilling prophesy, brought about by their own policies.

      1. Thor's Hammer

        Mexico, you present the historical pattern of growth of the US economy from 1948 to 2009 and imply that growth rates will tend to return to a similar norm of 3.28%. This assumption couldn’t be more delusional, as a simple mathematical calculation will demonstrate.

        “The greatest shortcoming of the human race is the inability to understand the exponential function.” Dr. Albert Bartlet. (http://www.peakprosperity.com/dr_albert_bartlett)

        A 3.28% growth rate generates a doubling of the starting state in only 21.3 years. If growth continues at the same rate the present 15.1 trillion dollar US GDP would become 30.2 trillion in 2034, 60.4 trillion in 2055, 120.8 trillion in 2076, 241.6 trillion before the end of the century, and greater than all the wealth in the known universe within another century or two.

        Prefer to follow the austerity growth rate of “only” 1.5%? The end result is the same. Only the time scale is slightly different with a doubling every 46.6 years instead of 21.3.

        GDP is historically correlated and co-dependent upon growth of energy consumption: growth in population requires growth in food production, people require water to drink and air to breathe—. None of these necessities will become exponentially more available over time.

        Only an economist (or politician) could devise a theory that that promoting exponential growth in a finite world maximizes human welfare over time. Never-the-less humans almost universally accept a belief system that worships material growth and species hegemony rather than finding their place in a sustainable universe.

        I’m coming to the conclusion that the answer to this paradox lies in the way our brains construct reality, rejecting information that doesn’t have origins in the perceived social reality they encounter during development. Individuals may break some of the bonds of socially constructed reality and perform acts of individual brilliance, but as a species we are are no wiser than any other species that exhausts the capacity of its ecological support system and collapses into extinction or evolves to adapt to the new diminished ecological reality.

        1. skippy

          Concur WRT GDP… its a craptastic tool[!] as the physical proceeds… the metaphysical.

          Skippy… push stuff into the wood chipper faster metric

    3. Procopius

      “Not demonstrated through empirical evidence? Like, four successive years of Social Security cash flow deficits (which will never reverse) isn’t ‘empirical evidence’?”

      Well, isn’t that what was foreseen in 1983? Isn’t that why they raised the rate? Isn’t that the reason for having the Trust Fund in the first place? Isn’t that why the Trustees project that they can pay full benefits until 2037 and 75% of (anticipated) benefit levels forever after that? Cash flow deficits were anticipated, they were supposed to happen. That’s why so many of us want to raise the cap on taxable salaries, which will basically solve the problem.

  4. alchemist

    Wonder how long it will be before the austerity programs come to what used to be called United States?

    “Affordable care act” insurance coverage does not cover children.

    “In deciding whether an employer’s health plan is affordable, the Internal Revenue Service said it would look at the cost of coverage only for an individual employee, not for a family. Family coverage might be prohibitively expensive, but federal subsidies would not be available to help buy insurance for children in the family.”

    http://www.nytimes.com/2013/01/31/us/politics/irs-to-base-insurance-affordability-on-single-coverage.html?_r=0

    1. NotTimothyGeithner

      Austerity already has come. States and localities have been dealing with austerity since 2007 with the decline of the housing market through spending cuts or tax/fee increases on the bottom 99%. I suppose its called devolution. Take the effects of NCLB or the nature of federal spending. Money spent on drones and asinine defense operations located near the Pentagon doesn’t reach local communities. Cutting money from “under performing” schools is a reality faced by communities every day.

    2. Ms G

      I read the article. If I understand correctly, Obama Care allows a definition of affordable (only the cost for 1 person, not dependents + spouse) that results in a working person with employer-insurance being unable to put spouse and kids on their insurance (because too expensive).

      The “fix” (for spouse and kids not having any coverage because too expensive) is to waive the penalty (for not having insurance) on the spouse and kids!

      So Obama care will uninsure and leave uninsured hundreds of thousands (?) of spouses and children but will make it up to them by waiving the penalty for not buying private insurance!

      “Affordable Care” Indeed. ObamaCare is the biggest ObamaConJob since he took office.

  5. Norman

    Re: Social Security, how about eliminating the perk of special congressial retirement, withholding theirs until age 65, their participation in S.S. like the rest of us, raising the mothly withholding the few cents to bring the inflow to positive, eliminating the cut off, paying into the fund regardless on every $$$$ paid, regardless of source. Oh, and how about if you work in the U.S.A., you pay taxes, fair taxes, not the garbage we have today.

  6. Generalfeldmarschall Von Hindenburg

    Peak oil, peak copper, peak iridium…it’s all hitting the fan. There’s no plan- other than the same tired crew of oligarchs maintaining control.

    The mass consumer growth oriented economy is finished. Two choices remain- submit to an autocratic, paternalist and essentially feudal regime, or start fighting back like they do in the streets of Greece.

    1. JEHR

      “an aging population is seen throughout these agreements as a threat to the fiscal sustainability of government expenditures.”

      I am really tired of the bashing of the elderly. We worked for 30+ years, we still pay taxes, and we try to stay healthy. We have looked after and educated our children and made sure our parents were looked after to their deaths. When those bashers get old, they may think twice about their previous prejudices against the elderly.

      Our only real “sin” is using the health care system and not buying gobs of unnecessary “stuff.”

      There, I feel better now!

  7. jsmith

    “Part of what they found is unsurprising: the IMF loves telling client states to shrink spending and government overall, and they are particularly keen on cutting social safety nets.”

    After the mob has put a bullet into your gut, the mob’s doctor – the IMF – is there to tell you to be more mindful of coughing up your protection money for better health in the future.

    Yup, just as how our own domestic austerians got balanced budget laws in 49 of the 50 states over the last 20 years so that municipalities and state would be screwed/seemingly unable to borrow from a government that issues its own currency, so were the EU participants suckered into giving up their own sovereign statuses and thus putting on the noose that our condemning them to their own bitter prescriptions.

    Funny, how happy, happy globalization sounded in the 90s, huh?

    How, sweet it was going to be what with all of the shrinking of the planet and everything?

    How bourgeois “multi-culturalism” was rolled out at the (corporate-funded) university level on down as the shiny veneer to the neoliberal capitalist hegemonic push that was really starting to begin in earnest?

    Bill Clinton playing the saxophone.

    The Pied Piper of Hamelin.

  8. Me

    None of this is new or surprising. Cheryl Payer had a great book on the IMF called The Debt Trap. It was written almost 40 years ago. Michael Hudson wrote Superimperialism a few years before that. Eric Toussaint has detailed how horrible the IMF and World Bank have been in practice. Hudson talked in Trade Development and Foreign Debt about the Bullion Debates in England following the war with France in the early 19th century. England was debating whether or not to go back onto gold and people like Ricardo were pushing for the gold standard as well as austerity. Economists like Malthus were against austerity. Ricardo lost the debates but, like usual with horrible economic ideas, his ideas still won within government. England did go back on gold, it did commit to austerity, Ricardo did believe in the quantity theory of money and England had one financial crisis after another throughout the remainder of the century thanks to that insane austerity. The Bank of England had to step in numerous times to bail out the economy. I could give lots of other examples. The point is that the failure of austerity has been known not just since the 2007 crash, or even since Hudson’s or Payer’s book, its been known for a couple of centuries.

    Those in power aren’t intersted in economic history or logic that challenges their pet theories and campaign backers. Obama will go down, in the end, as one of the worst presidents on record. He came into power on a popular mandate in 2008, I didn’t believe in him and had a feeling things would turn out this way. None the less, he came to power when these neoliberal ideas were causing economic collapse. If there were ever a time to re-think economic policy and to challenge our rightwar movement it was 2009 when the corporate whore Obama came into power. He refused to, he has tried his best to solidify the worst groups and ideas in our society and he has done so the benefit of financial rentiers and to the expense of the general public. The next time we’ll get a similar chance is when the economy crashes again, and it will. Our economy is fundamentally flawed and yet Obama has refused to fix what needs fundamental change. Well, we will pay the price in the coming years. It isn’t just Obama’s fault that we are in this position economically, but he was given a once in a generation, if not more, chance to change the course of the country and he refused to do so. To hell with him and his “progressive” followers.

    1. nonclassical

      ..agree, “me”….but follow the illogic (devolution)…had bushbama held Wall $treet accountable, it would have meant nationalizing banks…prosecuting fraudsters…the $$$$ gone to “secrecy jurisdictions” (Shaxson-”Treasure Islands” of international finance, leading historically to “loan back” financial scams such as “private equity” today, a variation on Meyer Lanskyism (think Hyman Roth-”Godfather”)…

      Can you imagine how many assassins bushbama would be facing had he nationalized Wall $treet banks??…to be blamed on some radical redneck, or
      commie sympathizer:

      http://www.secretsofthefed.com/the-men-who-killed-kennedy-the-truth-will-make-you-free-video/

    1. F. Beard

      Yep. The bankers have a government enforced monopoly on money creation which all of US have to rent.

      But hey, we be smart. All the warnings from history about usury annd banks is obsolete cause, ya see, we be smarter than dey be.

  9. ebear

    Ha! I’ll see your Mirabile Dictu and raise you one Quelle Surprise!

    http://www.youtube.com/watch?v=6Jn0Snx6yVA

    This monochrome effect is jumpin’ out
    But it hasn’t enough scale
    Though it isn’t rusted, it’s out of scale
    It’s a balance of gear in the heart
    Somebody said “Though there is a sky over the city,
    it’s narrow, and it’s dark.”
    The other side is invisible
    There are stars shining in the wide unchanging universe
    It’s the limitless universe
    The stars in the sky of the city are few, but that’s wrong
    ‘Cause the stars do shine behind the clouds
    everything slips trailingly
    This monochrome effect
    The circuit in my mind is cut off
    Even though I acquire cunning now
    I fall into greed as it is
    This monochrome effect is jumpin’ out
    But it hasn’t enough scale
    Though it isn’t rusted
    It’s out of scale
    It’s a balance of gear in heart

    1. Gibby the Fifth

      About a decade ago, the pension fund which pays me assumed that a male aged 60 at retirement would live to 77. Now it assumes 89. Big jump in costs! White collar staff, 89 looks a reasonable number, since I retired the company has increased the amount contributors pay by about 5% if they want to keep their existing benefits. And a big part of the pension fund was closed to new members in the early 1990′s.

  10. yoganmahew

    Could it be because countries all go bust in the same way?

    - Increase retirement benefits beyond collection levels.
    - Increase health spending beyond collection levels.
    - Reduce taxes on low/middle incomes.
    - Reduce taxes on ‘entrepreneurs’, no matter what funky pyramid scheme they’re running…

    The big lie is that you can be Norway when you don’t have oil or Sweden without the tax levels…

    1. nonclassical

      …you’re this far away from “the big LIE”, historically:

      http://www.amazon.com/Hot-Money-Politics-Debt-Third/dp/0773527435/ref=sr_1_1?s=books&ie=UTF8&qid=1359803956&sr=1-1&keywords=hot+money+and+the+politics+of+debt

      and this far away, contemporarily:

      http://www.amazon.com/Treasure-Islands-Dirty-Money-Havens/dp/0099541726/ref=sr_1_1?s=books&ie=UTF8&qid=1359804031&sr=1-1&keywords=treasure+islands+tax+havens+and+the+men+who+stole+the+world

      catchup…?

  11. Lafayette

    {Part of what they found is unsurprising: the IMF loves telling client states to shrink spending and government overall, and they are particularly keen on cutting social safety nets.}

    Dramatic bunk.

    The IMF is managed on behalf of developed nations that lend funds to nations in budget-difficulty. If there is a “difficulty”, it is typically because budgets have been implemented unprofessionally, replete with profligate spending and insufficient tax revenue collection. This scenario is so often recurrent in lesser developed nations (like Greece!) that it is no longer any great surprise.

    The US, as I understand, does not allow its member states to undertake and maintain chronically indebted budgets. Why should nations be allowed to do so? Both American states and national budgets suffer from the same willful excess – that of politicians who promise too much in order to get reelected.

    The EU has instituted the Golden Rule by which budgets must not transgress a GDP red-line permanently. Budgets must revert to a balance – meaning tax revenues must be consonant with government expenditures. Why is that such a bad rule?!?

    If a people want safety-nets and their government can barely afford it, then they will have to go without “other things” that they feel the government also should provide. This is the old “Guns or butter” argument, extended to a rationale where the “guns” are perhaps not the alternative but some social services must be sacrificed.

    Each nation must decide what it wants in terms of societal objectives and, yes, indeed, governments should strive to meet those needs. But that would take some pretty clever management by a political class that is a lot smarter than the ones generally in charge of indebted nations today.

    It nonetheless remains de rigeur for establishing national policy and its execution in countries with limited means to obtain government revenues either by means of consumption or income taxation. Succinctly, it must live within its means.

    And who would be best at insisting in schoolmarmish fashion for such discipline?

    Madame Lagarde, I assure you …

      1. Lafayette

        Oh, but they do:
        *You cannot get a mortgage in France unless you can justify your salary with three payslips. These payslips are verified with your employer.
        *One could obtain only rarely a mortgage without a down-payment of 10% of the total. Today it is closer to 20%.
        *Any mortgage is limited by an interest payment that must not be more than one-third of your total net income (as justified by your tax declaration of the previous year).

        The subprime loans that plagued French banks were almost entirely of US origin, bought by investment banks.

        ‘Nuff said … ?

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