The IMF’s Christine Lagarde presented the results of IMF’s latest consultation with the US, in which it cut its 2016 growth forecast from 2.4% to 2.2% and endorsed the Fed’s newly cautious stance on interest rate increases. Press stories focused on her discussion of the “four headwinds” that threaten to impede US growth over the long haul: declining labor force participation, high poverty rates, rising inequality, and falling productivity growth.
What Lagarde has done is describe some of the drivers of what is already acknowledged as the “new normal” or “secular stagnation”. And to the agency’s credit, it did not treat inequality and poverty as inevitable result of technological change, which is often the excuse invoked to put a Panglossian face on an economic system that has been reengineered to favor the few at the expense of the many.
The report recommends a set of policy changes, but not surprisingly, is unwilling to flag underlying drivers, like a lack of labor bargaining power; the serious cutbacks of government investment in research and development; weak anti-trust enforcement, which allows businesses to extract economically unproductive rents; and overfinancialization, which the IMF has called out in earlier reports. Nevertheless, for an analysis from an authoritative body that does not break neoliberal china, this is still pretty stern stuff.
The report is more pointed than the media summaries and I encourage you to read it in full. For instance:
3. Despite the ongoing expansion, the U.S. faces a confluence of forces that will weigh on the prospects for continued gains in economic well being. A rising share of the U.S. labor force is shifting into retirement, basic infrastructure is crumbling, productivity gains are scanty, and labor markets and businesses appear less adept at reallocating human and physical capital. These growing headwinds are overlaid by pernicious secular trends in income: labor’s share of income is around 5 percent lower today than it was 15 years ago, the middle class has shrunk to its smallest size in the last 30 years, the income and wealth distribution are increasingly polarized, and poverty has risen.
4. These secular forces both interact and reinforce each other. Demographic changes are slowing potential growth, delaying the renewal of business equipment, and depressing labor force dynamism. Reduced dynamism in the corporate sector has the potential to diminish innovation, deepen the loss of middle income jobs, and further polarize the income distribution. Income polarization itself can prevent productivity-improving investments in education by poorer households, lessen social mobility, add to economic insecurity, and limit consumption prospects. The causes of and interactions between these various forces are complex and not well understood. However, what is clear is that these trends are coinciding with a well-documented decline in potential growth (from above 3 percent in the early 2000s to below 2 percent today) that is being mirrored across a range of advanced and emerging economies. If left unchecked, these forces will continue to drag down both potential and actual growth, diminish gains in living standards, and worsen poverty.
However, the recommendations are a dog’s breakfast of what I liked to call at McKinsey, “cutting edge conventional wisdom,” including ideas that clearly do not work, like cuts in corporate and individual income taxes to “revitalize business dynamism and investment”, and worse, greater use of “indirect” meaning sales taxes, which are highly regressive. If you want to address poverty and inequality, this the polar opposite of what you’s want to implement. It also has a big plug for the TPP and “fundamental reform” of Social Security, which consists mainly of cutting benefits (raising retirement age, implementing chained CPI, and “increased progressivity of benefits” which sounds like code for “means testing”. Not surprisingly, it also gives bromides about dubious health care cost containment measures like “greater cost sharing with beneficiaries,” when that often leads people not to get care until they are really in distress and treatment is more costly and more use of electronic health care records, when we’ve explained how they are actually making matters worse as implemented in the US. Of course, the IMF recommends higher Medicare premiums.
The agency similarly regurgitates the myths of the policy elite, that the US has a shortage of STEM graduates, when it that were true, you’d see it reflected in pay levels. And for at least the last ten years, Slashdot regularly runs posts by new computer science grads seeking employment advice because they can’t find yeoman jobs. (See here for a debunking of the “STEM shortage” myth).
And earth to IMF, the hollowing out of junior and mid-level technical experts is a significant driver of the slide in productivity growth. It’s harder to come up with process improvements when you have extended supply chains and have outsourced components that involve either real skill or a lot of the customer interface to third parties.
But some of the IMF’s ideas are not bad:
• Increase state and federal infrastructure investment…
• Expand the Earned Income Tax Credit combined with an increase in the federal minimum wage.
• Upgrade social programs for the nonworking poor.
• Deepen and improve family-friendly benefits including paid family leave and childcare assistance.
So even though the IMF’s assessment is a mixed bag, it’s an indicator that reality is beginning to penetrate the Beltway bubble and that there is a real need to tackle inequality and distress, not just for the sake of those down the food chain, but for the benefit of the capitalist classes. But when will they take that message to heart?