The IMF: contrite and confused

The so-called ‘Neo-Liberal’ agenda is taking some flak from one of it’s supposed proponents, with the IMF publishing an article denouncing two of it’s alleged main policies, capital account liberalization (free international capital flows) and fiscal consolidation (or austerity). But the authors are confusing symptoms with causes.

According to the paper, capital account liberalization has contributed to more frequent boom and bust cycles. They are advocating use of capital controls as an option ‘when the source of an unsustainable credit boom is direct borrowing from abroad’. However, as Austrian economists will know, the causes of credit booms are not free capital flows, but artificial credit expansion by central banks. True, the money has to go somewhere, and with free capital movement freshly minted US dollars can make their way into for example an ‘Asian Tiger’ economy and contribute to the Asian financial crisis in 1997. But that does not mean that free capital flows were the cause of the crisis, rather that the boom and inevitable bust caused by artificial credit expansion manifested itself in booming Asian economies in the mid ‘90s, rather than somewhere else.

‘…financial openness has distributional effects, appreciably raising inequality’, the IMF also claims. True, increased inequality is a feature of central bank induced asset bubbles everywhere, but that’s simply due to the fact that rich people own more assets than poor people. To the IMF though, this is a feature of financial openness, not bubble blowing.

The article goes on to ask if there is ‘a defensible case for countries like Germany, the United Kingdom, or the United States to pay down the public debt’. Seems like the IMF is having second thoughts about changing their minds.  Remember that the IMF in 2013 warned George Osborne of the dangerous consequences of ‘austerity’ but in 2014 changed their tune once it became apparent that Armageddon was not imminent.

True to form, the IMF pays homage to aggregate demand: ‘Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment.’ This criticism is obviously based on Keynesian thinking and does not ring true for an Austrian. The thinking is also based on the premise that government spending is additive to GDP. Arguments to subtract for example military spending or maybe salaries to a wide range of regulators does not register at the IMF.

The IMF speaks from a standpoint that it is up to governments and supra-national organisations like themselves to deliver acceptable economic outcomes for their subjects. The authors conclude by suggesting that ‘no fixed agenda delivers good outcomes for all countries for all times’. In other words, we don’t know what works but we have to do something. Maybe no agenda at all will one day be given a try.

  1. Austerity has nothing to do with neoliberalism. The first involves cutting the gap between government spending and taxation: the second involves cutting the size of both.

    • Good point, no-one would call it neo-liberal if the government’s funding gap was closed by slapping taxes on the rich. Sadly, the word “liberal” is now used about many policies which the classical liberals would never have subscribed to.

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