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The IMF has a new set of studies out that warn the United States and other developed countries about their deficits and growing debt burdens. This raises the obvious question of why on earth do IMF economists still have jobs?
Just to remind everyone, the reason that we have 9.5 percent unemployment and the reason that the United States and other wealthy countries are running large deficits is that we had a huge housing bubble that burst and sank the economy. The boys and girls at the IMF somehow could not see this $8 trillion housing bubble. They thought everything was just fine back in 2002-2007.
This history raises the obvious question, if the IMF totally missed it in seeing the crisis coming, why would think they have any more clue on dealing with its consequences? Have they instituted better quality control for their economic analysis? Did they have a house cleaning in which all the incompetent economists who missed the bubble were sent packing?
No, nothing has changed at the IMF. So, we have the same group of people who could not an $8 trillion housing bubble giving us advice on our debt and deficit — telling us to cut our Social Security program.
If the boys and girls at the IMF can learn a little economics, they would discover that we can run a deficit that is pretty much as large as we want in a period of high unemployment like the present. This does not have to create a debt burden because the Fed can just buy and hold the debt. This way the interest on the debt is paid to the Fed, which is then refunded to the Treasury. If we are lucky this process will generate a little inflation which will lower the real interest rate and reduce the debt burden on households and the government.
If they have trouble with the theory, they can see how this works in practice. There is a small island nation where the central bank has bought an amount of debt that is almost equal to its GDP. It’s called "Japan." Its interest burden is less than 2 percent of GDP and the interest rate on long-term debt is well under 2.0 percent in spite of having a debt to GDP ratio of 220 percent.
It is incredible that IMF economists still have jobs. It is even more incredible that anyone in a policy position would waste their time listening to them.
DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.
This column was originally published by TMP Cafe.