By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.
It doesn’t matter who leads the IMF when the institution is governed by ideology.
Greece and Ireland appear to have lost an important political ally with the sidelining of Dominique Strauss-Kahn as both plead for more financial assistance from European partners to avoid an early restructuring of debt. The key word is “appears,” as in truth, arsenic remains arsenic, even if it is coated in sugar by an ostensible champagne socialist like Mr. Strauss-Kahn.
The reality is far more brutal for all of Europe. The IMF is bank-centric. Its standard requirement is that any recipient of its “aid” maintain a primary budget surplus, which amounts to a prohibition against fighting recession by increasing domestic demand via fiscal stimulus. The rationalization behind all IMF programs is that countries that follow “sound” financial policies — balanced budgets, tight money, deregulation, and privatization of capital assets — will be rewarded with a stamp of creditworthiness. They should then benefit by being able to borrow from private capital markets on favorable terms, relative to their own histories and the record of countries which are deemed less responsible. In principle this should mean they can run deficits on their trade accounts, loan-finance the purchase of capital goods imports to support development, and maintain high levels of economic growth and job creation. They should be able to do all of this and still attract inflows of direct foreign capital investment.
The rationale of controlling government debt and budget deficits is also consistent with a prevailing rising neo-liberal orthodoxy that promotes inflation control as the macroeconomic policy priority and asserts the primacy of monetary policy (a narrow conception notwithstanding) over fiscal policy. Fiscal policy is forced by this inflation-first ideology to become a passive actor on the macroeconomic stage.
It has been clear for several decades, however, that this argument is a myth, and that the promised land it envisions is a mirage. Consider the Fund’s experience with East Asia in 1997. Having praised the governments’ economic management up to just weeks before the onset in July 1997, the Fund panicked as much as the investors, intensifying the pullout. It called for the closure of insolvent finance companies and banks without seeming to worry about how uninsured depositors were treated, which triggered bank runs; and it identified fundamental problems that had to be fixed before growth could resume, sending a message that the economies were structurally unsound.
In the intervening years, the IMF has learned nothing, but still peddles the same economic myths that have done so much damage to the global economy. Ireland was an early (and eager) austerity proponent — starting to cut in early 2009. We were told that things would be improving as a result of the public cutbacks because all those tax-fearing consumers and investors were poised and ready to spend their savings – which were being earmarked to pay back the higher taxes that were going to be inevitably imposed to pay back the deficits.
This nonsense was all of the rave as mainstream economists and public finance commentators supported the Irish government’s manic decision to impose fiscal austerity on its near-ruined economy. And its misguided financial guarantees to its banks — which were vastly oversized relative to the size of the economy – significantly worsened the country’s budget deficit. That “busted the budget” and generated the current problems. In important respects, Ireland reproduced the Icelandic problem, with similar results. As we know, the people of Iceland have recently voted to undo the bank bail-out in spite of threats issued by the likes of the IMF.
Same thing in Greece. Unfortunately, the IMF supported behind this destructive economic austerity even under Strauss-Kahn.
Most mainstream economists have not recognized that changes in the government sector balance will have (opposite) consequences for the nongovernment sector balance. This is not a theory but a simple accounting identity based on double-entry bookkeeping. The ECB doesn’t seem to get this; nor do the Germans; nor does the IMF. But it’s very simple (and being amply demonstrated in the current travails of the euro zone): When the government sector goes into deficit, the shortfall equals the additional private sector saving (or reduction of private sector deficit), plus additional net imports.
By adopting the euro, both Greece and Ireland abandoned the option of allowing their currency to depreciate as a means of improving its current account stance. Without this option, it is hard to imagine how either country could boost its exports, which is the only way either can escape their debt traps, given the inability to conduct an independent fiscal policy. Austerity of the kind advocated by Strauss-Kahn and his market fundamentalistas at the Fund damages private expectations (encouraging risk averse spending patterns and more saving) and directly reduces aggregate demand. The only thing that drives output, income and employment growth is spending, which is precisely what the IMF’s programs are designed to frustrate. That its destructive policy mixes have hitherto been coated in the honey-sweet words of a former French Socialist Finance Minister, does not make them any easier to swallow.
It’s the institution that’s the problem, no matter who takes over from Strauss-Kahn, whose future public career is almost certainly shredded regardless of the ultimate outcome of this particular case. Expecting the Fund to change is akin to painting a leopard black, and thinking that this will change its predatory behavior.