Wednesday, April 15, 2015

IMF wants austerity and social security reform in the US

Blanchard presenting the WEO Report at the Spring Meetings

The new edition of the bi-annual World Economic Outlook is out (there is one in April and one in October). Olivier Blanchard, from MIT, and the IMF's Economic Counsellor since 2008, is the intellectual force behind the report. In the IMF's view, in the case of the United States:
"The next prominent policy challenge will be a smooth normalization of monetary policy. Building political consensus around a medium term fiscal consolidation plan and supply-side reforms to boost medium-term growth—including simplifying the tax system, investing in infrastructure and human capital, and immigration reform—will continue to be a challenge." [Italics added]
Fiscal consolidation is IMF speak for austerity. Austerity is really about less spending, and higher taxes, but fiscal consolidation should be about the results, meaning lower deficits and debt. Note that austerity is NOT the best way to get fiscal consolidation. Also, normalization of monetary policy can only mean higher interest rates. So for the IMF we are at the natural rate, or so it seems.

In the case of the US labor markets are seen as flexible enough, so immigration is seen as central for keeping real wages low, rather than further deregulation. Yes, supply side reforms are often about lowering real wages. They do not provide much in terms of what austerity would mean. Again from the report:
"Addressing the issue of potential growth will require implementation of an ambitious agenda of supply-side policies in a fractious political environment. Forging agreement on a credible medium-term fiscal consolidation plan is a high priority... [This] will require efforts to lower the growth of health care costs, reform social security, and increase tax revenues." [Italics added]
Reform social security is IMF speak for cutting and delaying benefits, and increasing payroll taxes. Not necessarily privatize it, although some might be in favor of that at the IMF. So supposedly in the US the priority is to promote austerity by reforming social security. The New IMF is great.

On the plus side, the IMF has rediscovered the accelerator (I checked a few older versions and have seen no trace of the accelerator in the last couple of reports) and the report shows:
"estimates of how much investment weakness can be explained by output dynamics based on investment models estimated at the individual-country level. The analysis is based on the conventional accelerator model of investment... A key assumption is that firms adjust their capital stock gradually toward a level that is proportional to output. In addition, firms are assumed to invest to replace capital that depreciates over time... The empirical literature has found strong support for this model, as in Oliner, Rudebusch, and Sichel 1995 and Lee and Rabanal 2010 for the United States, and, more recently, in IMF 2014a and Barkbu and others 2015 for European economies."
Funny, so supply responds to demand, that is, firms adjust their supply capacity to expected demand, but all reforms for growth are based on supply side factors. Yeah, way to use the right theory, but keep the wrong policy advice.

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