IMF demonstrates mainstream economics has ossified but remains dominant

Last week (April 11, 2023), the IMF released their half-yearly update – World Economic Outlook: A Rocky Recovery, April 2023 – which excited the headlines in the media with predictions of gloom and calls for fiscal austerity and more interest rate hikes. The only good thing about these reports every six months is the accompanying datasets, which allows for fairly quick comparative analysis across nations. Other than that, the textual narratives are pure mainstream economics Groupthink and demonstrate how if one starts from a particular and flawed set of principles, everything else that follows undermines the stated goal. This is a recurring story – we have seen this with these multilateral agencies over and over again. The point to understand is not to try to interpret these IMF reports as being knowledge-based or compiled as if they are pursuing knowledge. They are parts of the ideological weaponry that seeks to sustain and advance neoliberalism and the power relations inherent in that ideology while purporting to be expert commentary.

The IMF Report certainly titillated the journalists and they produced all sorts of lurid headlines like;

– “IMF warns Australian housing market at high risk of mortgage defaults ahead of global economic downturn”

– “IMF expects Australia’s economy to slow amid ‘perilous’ international pressures”

– “Horror risk facing Aussie homeowners”

– “The IMF warns of ‘rocky road’ ahead”

– “IMF warns global economy is entering ‘perilous phase'”

And more like that.

peril, horrow, rocky …

Scary, n’est-ce pas?

The perfect warm-up for us to accept major cuts in government spending and even further (ridiculous) interest rate increases.

Job done at the IMF for another six months.

The UK Guardian article wrote in the Australian edition (April 12, 2023) – IMF expects Australia’s economy to slow amid ‘perilous’ international pressures – that the:

International Monetary Fund forecast echoes predictions from Treasury and RBA …

The old ‘cops investigating cops’ sort of approach.

As if the “predictions from the Treasury and RBA” are an authority.

That ‘benchmark’ is not questioned by the journalist – the story wants the reader to accept that the IMF has credibility because it is just reiterating the work of other local institutions.

Whereas, the reader should have been told that the Australian Treasury and RBA have an appalling forecasting record and systematically fail rather than fail on a once-off basis.

Then the reader might have been enlightened about the IMFs appalling record of forecasting, which reached the heights of indecency during the Greek bailout period during the GFC when the institution was forced to recant and admit their modelling was diametrically in error – that is, not just a little wrong, but completely wrong in their expenditure multiplier estimates.

The outcome of that folly was devastation for Greece, which it has not recovered from and millions of euros in public property transferred by forced privatisations to the greed of the financial markets.

I wrote about that in this blog (among others) – The culpability lies elsewhere … always! (January 7, 2013).

No-one lost their jobs as a result of the disastrous IMF interventions.

They just go on as if nothing happened.

The IMF economic forecasting model that produced these disastrous outcomes is largely unchanged.

So why would anyone give the output from them credence now?

You get an instant exposure to the problem in the opening paragraph of the IMF Director’s blog – Inflation is slowly falling, but economic growth remains historically low and financial risks have risen (April 11, 2023) – which accompanied the release of the April WEO.

He wrote:

The global economy’s gradual recovery from both the pandemic and Russia’s invasion of Ukraine remains on track. China’s reopened economy is rebounding strongly. Supply chain disruptions are unwinding, while dislocations to energy and food markets caused by the war are receding. Simultaneously, the massive and synchronized tightening of monetary policy by most central banks should start to bear fruit, with inflation moving back towards targets.

Think about the wording.

First, global economic growth continues.

Second, the causes of the inflationary pressures – “supply chain disruptions” and “dislocations to energy and food markets caused by the war” are all resolving, which is why the headline inflation rates are declining rather quickly.

The central bankers are claiming this decline is not fast enough – but give no coherent rationale as to what would be an acceptable rate of decline.

All they say is that if inflation remains above their ‘targets’ then a wage-price spiral might take off and perpetuate the inflation.

This is despite no evidence anywhere of such a spiral occurring with real wages being cut all over the world, even though unemployment rates are relatively low at present.

Third, then, the Director tries to claim that the “massive and synchronized tightening of monetary policy” is likely to “bear fruit” by driving down inflation.

Yet, inflation is falling because the driving factors, which are not sensitive to central bank interest rate rises, are abating.

And the only ‘fruit’ that the interest rate rises are ‘bearing’ is a massive redistribution of income from low-paid mortgage holders to those holding financial wealth.

And, soon, if the interest rate mania continues, the ‘fruit’ will be in the form of rising unemployment.

Eventually, if interest rates are pushed high enough, a recession is likely because spending at the low-income end falls faster than that the extra spending at the high-income end where interest rate rises boost incomes.

And, that ladies and gentlemen and those who stand apart from that dichotomy, is really what this is about.

The mainstream keep telling us that we are beyond full employment and so there is a need for higher unemployment to bring the jobless in line with the pool size, they claim is inflation-neutral – that is, the Non-Accelerating Rate of Unemployment (NAIRU).

The RBA officials in a recent enquiry made that exact claim and used it to justify the recent interest rate rises.

I discussed that in this recent blog – RBA appeal to NAIRU authority is a fraud (February 23, 2023).

But you can see the tension that the mainstream have:

1. Unemployment is relatively low and so far the interest rate rises have not killed off spending – as the mainstream macroeconomic models that are used to justify the interest rate rises would indicate.

2. Inflation is dropping quickly because supply constraints are easing.

So how can that be?

The central bankers economic model would require unemployment to rise ‘before’ the inflation started dropping quickly.

Guess which is wrong?

Now the IMF want austerity back

The IMF admit some confusion:

Activity too shows signs of resilience as labor markets remain historically tight in most advanced economies. At this point in the tightening cycle, we would expect to see stronger signs of output and employment softening. Instead, both output and inflation estimates have been revised upward for the past two quarters, suggesting stronger-than-expected demand …

Any reasonable assessment of this contradiction would take the ‘fact’ as a fact and the ‘expectation’ as a mistake.

I have noted the old statement from an economics lecturer that when the facts contradict the theory the facts are wrong.

This is one of the hallmarks of Groupthink – denying the reality before your eyes because somehow it doesn’t accord with what your theoretical priors were predicting you should see.

Which usually leads to a follow up that makes matters worse.

So the next part of that quote in the IMF Report went like this:

… which may require monetary policy to tighten further or to stay tighter for longer.

This is the problem.

They do not question that the ‘tightening monetary policy’ may not do what they thought, which a reasonable researcher not afflicted by Groupthink would proffer as the first question to be asked when predictions fall short.

No, that would be the conduct of an open science.

Instead, the IMF Groupthink says more of the same.

Why?

Because that is what their ideological position demands.

Remember the definition of insanity that is attributed (without evidence) to Albert Einstein:

Insanity is doing the same thing over and over and expecting different results.

Whoever actually said that, the message is apposite.

Groupthinkers regularly satisfy this condition for insanity.

The problem is that the rest of us do not recognise the madness and the consequences of the madness are profound in terms of increasing human suffering.

But it gets worse.

The IMF know that they need the ‘wage-price spiral’ story to justify interest rate rises so they write:

Nominal wage inflation continues to lag far behind price inflation, implying a steep and unprecedented decline in real wages. Given the tightness in labor markets, this is unlikely to continue, and real wages should recover.

So, no wage-price spiral in sight.

But there will be – why? – because the “tightness in the labor markets” say so – which is just a description of their flawed economic forecasting models.

Of course, they don’t actually calibrate ‘tightness’ except in relation to the fact that unemployment is now mostly lower than it has been for a long time.

So that is ‘tightness’.

Except that the reference period (a long time) was characterised by elevated levels of mass unemployment delivered by governments pursuing fiscal austerity as advocated by the likes of the IMF.

So any lower unemployment would be ‘tightness’ except the benchmark use was extreme ‘looseness’.

And, in relation to Australia, they keep talking about full employment.

As I showed in last week’s labour force commentary – Australian labour market – relatively steady and defies the RBA reckoning (April 13, 2023) – there is currently at least 9.7 per cent of the available and willing labour force unemployed or underemployed and participation rates are below peak.

Has the language lost that much meaning that we are allowed to equate nearly 10 per cent of the labour force being idle with full capacity?

The point is that justifying higher interest rates upon outcomes expected from an economic model that has failed to predict or explain the facts is no justification at all.

But it gets even worse!

On the question of profit gouging the IMF has nothing meaningful to say.

They write:

Corporate margins have surged in recent years — this is the flip side of steeply higher prices but only modestly higher wages — and should be able to absorb rising labor costs on average.

Surging corporate margins are not the flip side of higher inflation and real wage cuts and rising costs.

Profit margins are some quantum over unit costs, which are formulated upon aspirations for rates of return on capital moderated by considerations for maintaining market share.

In other words, firms want to get as much profit as possible but know that if they get too greedy they will lose customers, which will undermine their profit aspirations.

So if unit costs rise and the firm has market power (meaning they set their own prices) then they will increase prices by applying that fixed mark-up to the higher unit costs.

But surging corporate margins means that the firms are pushing prices up beyond the unit cost rises to gouge out a higher profit rate.

I wrote about that in this blog post – The inflationary episode is being driven by profit gouging and interest rate hikes won’t help much (March 27, 2023).

But it gets even worse than that!

The IMF recognise that the “policy tightening of the past 12 months is starting to have serious side effects for the financial sector” and recount how the interest rate increases have threatened the stability of the financial system as commercial banks go under.

Their interpretation of this is that it might be a “silver lining” because:

… the banking turmoil will help slow aggregate activity as banks curtail lending in the face of rising funding costs and of the need to act more prudently.

So, at a time when the inflation is abating and will resolve soon enough, the IMF thinks it is a virtuous outcome that banks collapse so that other banks cut lending and create recessionary pathways.

Which will push up unemployment and increase bankruptcies.

But it gets even worse than that!

By now you will see how the wrong starting point takes us on a journey where the subsequent musing just comes up with even more dysfunctional reasoning.

So, at this stage, the IMF warns against “any expectation that central banks will abandon the fight against inflation” because that might mean unemployment would not rise sufficiently.

But, in addition, we get to the point of the exercise:

Tighter fiscal policy can also play an active role. By cooling off economic activity, it would support monetary policy, allowing real interest rates to return faster to their low natural level … [and] … Appropriately designed fiscal consolidations will also help rebuild much needed fiscal buffers and
help strengthen financial stability.

And at that stage I am glad I have a good head of hair!

Conclusion

If we thought there had been progress in the economics profession since the GFC then we were wrong.

For those MMTers who claimed ‘we have won’ – delusion is the assessment.

The economics academy is ossified – caught in a dysfunctional Groupthink and incapable of moving on any time soon.

MMTers have only made glancing inroads.

More crises and hardship will come as a result of the policy dominance of the New Keynesian mainstream.

I know from history that degenerative paradigms in the Lakatosian sense eventually collapse but there is no guarantee of when that will occur or whether the replacement will be evidence-based or otherwise.

When the Monetarists gained dominance over the Keynesian paradigm in the 1970s, it was a case of replacing an evidence-based framework that needed additional components, with a ideological dream world.

So there was no progress – just an ideological victory for the elites.

We might hope for a better future!

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.