FacebookTwitterRedditEmail

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. 

Weekend Edition
March 22, 2019
Friday - Sunday
Henry Giroux
The Ghost of Fascism in the Post-Truth Era
Gabriel Rockhill
Spectacular Violence as a Weapon of War Against the Yellow Vests
H. Bruce Franklin
Trump vs. McCain: an American Horror Story
Paul Street
A Pox on the Houses of Trump and McCain, Huxleyan Media, and the Myth of “The Vietnam War”
Andrew Levine
Why Not Impeach?
Bruce E. Levine
Right-Wing Psychiatry, Love-Me Liberals and the Anti-Authoritarian Left
Jeffrey St. Clair
Roaming Charges: Darn That (American) Dream
Charles Pierson
Rick Perry, the Saudis and a Dangerous Nuclear Deal
Moshe Adler
American Workers Should Want to Transfer Technology to China
David Rosen
Trafficking or Commercial Sex? What Recent Exposés Reveal
Nick Pemberton
The Real Parallels Between Donald Trump and George Orwell
Binoy Kampmark
Reading Manifestos: Restricting Brenton Tarrant’s The Great Replacement
Brian Cloughley
NATO’s Expensive Anniversaries
Ron Jacobs
Donald Cox: Tale of a Panther
Joseph Grosso
New York’s Hudson Yards: The Revanchist City Lives On
REZA FIYOUZAT
Is It Really So Shocking?
Bob Lord
There’s Plenty of Wealth to Go Around, But It Doesn’t
John W. Whitehead
The Growing Epidemic of Cops Shooting Family Dogs
Jeff Cohen
Let’s Not Restore or Mythologize Obama 
Christy Rodgers
Achieving Escape Velocity
Monika Zgustova
The Masculinity of the Future
Jessicah Pierre
The Real College Admissions Scandal
Peter Mayo
US Higher Education Influence Takes a Different Turn
Martha Rosenberg
New Study Confirms That Eggs are a Stroke in a Shell
Ted Rall
The Greatest Projects I Never Mad
George Wuerthner
Saving the Big Wild: Why Aren’t More Conservationists Supporting NREPA?
Norman Solomon
Reinventing Beto: How a GOP Accessory Became a Top Democratic Contender for President
Ralph Nader
Greedy Boeing’s Avoidable Design and Software Time Bombs
Tracey L. Rogers
White Supremacy is a Global Threat
Nyla Ali Khan
Intersectionalities of Gender and Politics in Indian-Administered Kashmir
Karen J. Greenberg
Citizenship in the Age of Trump: Death by a Thousand Cuts
Jill Richardson
Getting It Right on What Stuff Costs
Matthew Stevenson
Pacific Odyssey: Puddle Jumping in New Britain
Matt Johnson
The Rich Are No Smarter Than You
Julian Vigo
College Scams and the Ills of Capitalist-Driven Education
Brian Wakamo
It’s March Madness, Unionize the NCAA!
Beth Porter
Paper Receipts Could be the Next Plastic Straws
Christopher Brauchli
Eric the Heartbroken
Louis Proyect
Rebuilding a Revolutionary Left in the USA
Sarah Piepenburg
Small Businesses Like Mine Need Paid Family and Medical Leave
Robert Koehler
Putting Our Better Angels to Work
Peter A. Coclanis
The Gray Lady is Increasingly Tone-Deaf
David Yearsley
Bach-A-Doodle-Doo
Elliot Sperber
Aunt Anna’s Antenna
March 21, 2019
Daniel Warner
And Now Algeria
FacebookTwitterRedditEmail