FacebookTwitterGoogle+RedditEmail

Signs of Intelligent Life at the IMF?

The International Monetary Fund (IMF) held a conference last week devoted to re-examining macroeconomics in the wake of the economic crisis. This conference was evidence of a Glasnost that would have been unimaginable a decade ago. One of the organizers and speakers was Nobel Laureate Joe Stiglitz, a man who had previously been persona non grata at the IMF after he had trashed the institution in a piece in the New Republic back in 2000.

In addition to Stiglitz, the conference included several speakers who were quite critical of the economic policies pushed by the IMF in recent years. Given the format and the large number of speakers, there was limited opportunity for back and forth in these sessions. However, at least the important questions were being asked.

In spite of the increased openness of the discussion at the IMF it is not clear that its policies have undergone a similar adjustment. In particular, it openly touts the route of “internal devaluation” for countries that have fixed the value of their currency to other currencies or don’t have their own currency.

This is an incredibly painful process. The idea is that a country that has high unit labor costs relative to its trading partners will get its costs in line by lowering wages. The way that they lower their wages is to force workers to take pay cuts under the pressure of high rates of unemployment.

Latvia is currently the poster child for internal devaluation. Its unemployment rate is 18 percent. The IMF path would have other countries with serious competitiveness problems such as Ireland, Greece, Spain and Portugal go the same path.

The alternative would be to promote a somewhat higher rate of inflation in the surplus countries, most importantly Germany. Higher inflation in the surplus countries would allow the deficit countries to regain competitiveness simply by having their wages rise less rapidly than the inflation rate in the surplus countries. This could be accomplished without the double-digit unemployment rates that these countries are now enduring.

This route is consistent with the path suggested by Olivier Blanchard, the IMF’s chief economist, in a paper he wrote last year. A higher inflation rate would also have the benefit of eroding the real value of the debt for both heavily indebted countries and heavily indebted homeowners. This would allow these economies to get back on a normal growth path more quickly.

Remarkably, IMF policy still doesn’t seem to allow for the possibility that somewhat higher rates of inflation might actually be the best path under some circumstances. Many of the speakers seemed to still believe that the policy of inflation targeting, in which central banks target a 2.0 percent inflation to the exclusion of all other concerns, is the best route to pursue. This certainly seems to be the practice at the European Central Bank, as well as at many other central banks around the world.

This should have populations everywhere rising up with their pitchforks. Inflation targeting has led to an enormous economic and human disaster, likely costing the world more than $10 trillion in lost output and leaving tens of millions of people unemployed. If this experience is not enough to discredit a policy, it is difficult to imagine any possible set of events in the world that could lead the inflation targeters to change their minds.

In this respect the arguments set out in the IMF conference should be useful for political purposes even if they have little immediate effect on the conduct of central banks or the policy prescriptions of the IMF. The fact that many of the world’s most prominent economists, including even the chief economist at the IMF itself, can make policy prescriptions that are essentially ignored by those conducting policy, provides more evidence that policy is not being guided by neutral individuals seeking the best outcome.

This is yet another piece of evidence that the central bankers and others directing policy place the interests of the financial sector at the center of their concern. For the financial industry, a modest rise in the inflation rate would genuinely be bad news, reducing the value of their assets and the real value of their interest income.

In order to ensure that the major banks of the world do not have to deal with this situation, the central banks are prepared to force tens of millions of people to remain out of work. If we had real democracies, the central bankers who couldn’t do their job would be the ones out of work right now.

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 The Guardian.

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

December 19, 2018
Carl Boggs
Russophobia and the Specter of War
Jonathan Cook
American Public’s Backing for One-State Solution Falls on Deaf Ears
Daniel Warner
1968: The Year That Will Not Go Away
Arshad Khan
Developing Country Issues at COP24 … and a Bit of Good News for Solar Power and Carbon Capture
Kenneth Surin
Trump’s African Pivot: Another Swipe at China
Patrick Bond
South Africa Searches for a Financial Parachute, Now That a $170 Billion Foreign Debt Cliff Looms
Tom Clifford
Trade for Hostages? Trump’s New Approach to China
Binoy Kampmark
May Days in Britain
John Feffer
Globalists Really Are Ruining Your Life
John O'Kane
Drops and the Dropped: Diversity and the Midterm Elections
December 18, 2018
Charles Pierson
Where No Corn Has Grown Before: Better Living Through Climate Change?
Evaggelos Vallianatos
The Waters of American Democracy
Patrick Cockburn
Will Anger in Washington Over the Murder of Khashoggi End the War in Yemen?
George Ochenski
Trump is on the Ropes, But the Pillage of Natural Resources Continues
Farzana Versey
Tribals, Missionaries and Hindutva
Robert Hunziker
Is COP24 One More Big Bust?
David Macaray
The Truth About Nursing Homes
Nino Pagliccia
Have the Russian Military Aircrafts in Venezuela Breached the Door to “America’s Backyard”?
Paul Edwards
Make America Grate Again
David Rosnick
The Impact of OPEC on Climate Change
Binoy Kampmark
The Kosovo Blunder: Moving Towards a Standing Army
Andrew Stewart
Shine a Light for Immigration Rights in Providence
December 17, 2018
Susan Abulhawa
Marc Lamont Hill’s Detractors are the True Anti-Semites
Jake Palmer
Viktor Orban, Trump and the Populist Battle Over Public Space
Martha Rosenberg
Big Pharma Fights Proposal to Keep It From Looting Medicare
David Rosen
December 17th: International Day to End Violence against Sex Workers
Binoy Kampmark
The Case that Dare Not Speak Its Name: the Conviction of Cardinal Pell
Dave Lindorff
Making Trump and Other Climate Criminals Pay
Bill Martin
Seeing Yellow
Julian Vigo
The World Google Controls and Surveillance Capitalism
ANIS SHIVANI
What is Neoliberalism?
James Haught
Evangelicals Vote, “Nones” Falter
Vacy Vlanza
The Australian Prime Minister’s Rapture for Jerusalem
Martin Billheimer
Late Year’s Hits for the Hanging Sock
Weekend Edition
December 14, 2018
Friday - Sunday
Andrew Levine
A Tale of Two Cities
Peter Linebaugh
The Significance of The Common Wind
Bruce E. Levine
The Ketamine Chorus: NYT Trumpets New Anti-Suicide Drug
Jeffrey St. Clair
Roaming Charges: Fathers and Sons, Bushes and Bin Ladens
Kathy Deacon
Coffee, Social Stratification and the Retail Sector in a Small Maritime Village
Nick Pemberton
Praise For America’s Second Leading Intellectual
Robert Hunziker
The Yellow Vest Insurgency – What’s Next?
Nick Alexandrov
George H. W. Bush: Another Eulogy
Patrick Cockburn
The Yemeni Dead: Six Times Higher Than Previously Reported
Brian Cloughley
Principles and Morality Versus Cash and Profit? No Contest
Michael F. Duggan
Climate Change and the Limits of Reason
FacebookTwitterGoogle+RedditEmail