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Latest IMF report on Australia is food for uncritical and lazy journalists but garbage nonetheless

The IMF regularly conduct ‘missions’ to member countries, where a group of highly paid economists trot out to a capital city somewhere, hole up in some luxury hotel, and have a few meetings with Treasury officials and the like and then shoot through after the short visit back to whence they came and produce their report. On October 31, 2023, the IMF published – Australia: Staff Concluding Statement of the 2023 Article IV Mission – which attracted a lot of mainstream press attention in Australia. The message that the public received was summarised in this article – International Monetary Fund says Australia needs higher interest rates. The article carried no qualifications or reflection on the methodology. The journalists who have a high profile in the mainstream national media sanctioned without question the IMFs conclusions. That is what goes for information in these times. It is an assault on our collective intelligence really.

The aforementioned press article started with the lurid headline and then went immediately into the sub-plot:

The International Monetary Fund has urged the Reserve Bank to lift official interest rates further while warning they may have to go even higher if the nation’s governments don’t abandon or delay some of their multibillion- dollar infrastructure projects.

That is the narrative.

Rising rates – why?

Answer: Excessive fiscal deficits – governments have to abandon major projects that are, in part, designed to help in the transition to a more sustainable economy.

And the lack of critical scrutiny by these journalists is stunning and, in my view, makes them just lackeys of the IMF rather than investigative and independent press agents.

If you read the IMF Report (cited in the Introduction) you will find out more than the journalists were willing to write.

Essentially, the media report failed to even put the pieces together.

The IMF claims that in relation to Australia that:

Unemployment remains low, output above potential, and housing prices have picked up after a correction in 2022 … headline inflation has peaked … but staff assess that more is needed to bring inflation back to target and keep inflation expectations anchored.

In terms of inflation, they write:

… despite a recent moderation, services inflation remains high and broad-based, driven by strong demand, input cost pressures from both labor costs (reflecting historically tight labor markets and weak productivity outcomes) and non- labor costs (such as rent and electricity),

I must live in a parallel universe because labour costs are not rising significantly and real wages are still being cut.

Further, real wages are trailing the ‘weak’ productivity growth, which means that real unit labour costs are falling as more national income is redistributed towards profits.

And, in relation to the so-called non-labour costs they mention, electricity pricing is high because the privatised corporations have been profit gouging to their hearts content and failing to invest in the necessary infrastructure to integrate the growing supply from solar.

That source of CPI inflation will not be sensitive to higher interest rates.

What is needed is tighter regulation and a reversal of the privatisation of the public utilities.

And, rental prices are rising fast because the Reserve Bank of Australia has been hiking interest rates – it is a classic example of monetary policy that is alleged to be fighting inflation actually causing inflation.

As a note, I consider it an insult that the IMF uses American spelling when discussing Australia but then the IMF considers their approach to be a one-size-fits-all, which is why they get things badly wrong in many situations.

It is a modern form of Imperial colonialism!

Further, as I reported last week in the blog post covering the latest inflation data in Australia – Slight rise in Australian inflation rate driven by factors that do not justify further rate hikes (October 25, 2023) – inflationary expectations in Australia are not signalling any major upward shift.

Two of the main time series are within the RBA target range and the others are approaching the upper limit as they fall.

There is no justification for further interest rate hikes based on the data we have available on inflationary expectations.

The IMF also claim that:

Output is estimated at around 1 percent above potential …

This is really the nub of it.

It is programatic that if ‘output gaps’ are above positive – that is output is estimated to be above potential – then the appropriate response is to tighten fiscal and monetary policy.

Why?

Because it would mean that overall spending was outstripping the supply capacity of the economy to absorb it and the adjustment fuse would be rising prices.

The RBA and the IMF are clearly claiming that the current inflationary episode is being driven by demand factors, whereas I consider it clear that supply factors have instigated the episode and will abate over time, without any need to adjust interest rates.

But even with that, the use of output gaps to guide policy is controversial.

The IMF article from its Finance and Development series – The Output Gap: Veering from Potential – will help you understand what the IMF means when they talk about output gaps and their relation to policy.

But the problem is that these measures are notoriously innacurate and biased to support the IMF ideology that predicates against government intervention as a starting point.

The following graph shows the IMF Output Gap measure on the horizontal axis (per cent of potential GDP) and the various labour underutilisation measures on the vertical axis (per cent of labour force).

The three labour underutilisation measures are:

1. Official unemployment rate.

2. Underemployment rate (part-time worker who want more hours of work but cannot find them).

3. Broad underutilisation rate (the sum of 1 and 2).

The dotted lines associated with each of the labour underutilisation measures are the linear trends.

The graph is actually very interesting as I am sure you will see.

Effectively, increases and decreases in the IMF output gap measure are invariant to shifts in the official unemployment rate, which surely should cast doubt on your confidence in the IMF measure.

According to the IMF, Australia can have a 4 per cent output gap (an aggregate measure of excess capacity) when the unemployment rate is around 6 per cent.

But, equally, they claim the output gap can be positive 4 per cent, meaning GDP is at 104 per cent of Potential GDP – which the IMF classifies as over full employment at exactly the same official unemployment rate.

If you believe that then send me an E-mail and I can sell you the Sydney Harbour Bridge for cheap and throw in the Sydney Opera House just for fun.

The problem is in the way they estimate potential GDP and the underlying NAIRU measures they use to depict full capacity in the labour market.

The NAIRU is the Non-Accelerating-Rate-of-Unemployment and is estimated indirectly (because it is no observable) from econometric equations, which are themselves subject to extreme imprecision.

So you get standard errors around point estimates of the NAIRU that are wide, which means we can be equally confident that the NAIRU is somewhere between say 2 and 8 per cent when the point estimate is say 5 per cent.

In other words, it is so imprecise that even if you believe in the underlying theoretical framework, the imprecision renders it useless for policy purposes.

Yet, organisations such as the IMF persist in using it exactly for that purpose because they know the imprecision is systematically biased towards the conclusion that the current degree of fiscal expansion is excessive.

In other words, their measures of potential GDP are always biased downwards because their estimates of the full employment unemployment rate is always biased upwards.

So, this bias suits their ideological agenda for smaller government involvement in the economy.

It is of course a loaded game.

And in the reports that the media love to publish with lurid headlines, the details are never reported and so all the public gets is the ideological bias packaged in statements such as “interest rates have to rise further”.

I doubt the journalists that write these reports even know the detail themselves.

They are just pawns in the ideological battle that the elites wage against ordinary workers and which over the last several decades have resulted in elevated levels of labour underutilsation, suppressed wages growth and rather large redistributions of national income to profits.

The result has been income and wealth inequality has risen and the quality and scope of public service delivery has been degraded.

Such shifts benefit some at the expense of the many.

Testing the proposition

I would like to test the proposition by announcing that the Federal government will abandon the mean-spirited income support system for unemployment and instead offer a Job Guarantee at a socially-inclusive living wage (which would become the minimum wage) to any worker who desired to work and could not find a job and any worker who was currently seeking more hours of work but due to demand constraints could not find them.

What do you think would happen?

Socially and environmentally useful output would rise.

The well-being of those currently unemployed and underemployed who took up the job offers would rise.

Poverty among the jobless and those trapped in the gig economy would fall.

Inflation wouldn’t respond at all.

That would suggest the output gap measures of the IMF, which motivate the policy advice are hopelessly wrong.

I consider it impossible to have around 10 per cent of available and willing labour not working in one way or another (either unemployed or underemployed) and the economy to be judged to be over capacity.

Conclusion

Unfortunately, the local media provides no insights into the garbage that the IMF continues to pump out.

How many times does the IMF have to be discredited (think Greek bailout, failed SAPs for decades, etc) for the local press to, at least, be critical of the reports the IMF publishes?

That is enough for today!

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

This Post Has 6 Comments

  1. The drum beating for an RBA rate increase on Melbourne Cup Day has been going on for a week or so from “expert” orthodox economists employed by the major banks (I wonder who benefits if there’s an increase). The stenographers and churnalists of the MSM have been putting out what they have said, with an odd exception, to soften up the citizens. If something is repeated multiple times within the peer group’s echo chamber then it must be true, mustn’t it? No critical analysis or looking back at any empirical data. It’s what would pass for propaganda from a captured media in any equivalent circumstance. No need for questioning because they’ll get paid just the same for running the press releases.

    Will Bullock and the RBA Board resist the clamour or will they just go with the flow of confirmation bias? Put your wagers on now!

  2. As an engineer I some times find it usefull to consider the end state.

    So what is the end state for neolibralism?

    I suggest it is one person owning all the money in the world with a small number remaining people as slaves.

  3. Nothing disabuses you of the notion of “rule by experts” quite like getting to know some experts. But I’ll leave a line from Oscar Wilde’s short story “The Canterville Ghost” — “Indeed, in many respects, she was quite English, and was an excellent example of the fact that we have really everything in common with America nowadays, except, of course, language.”

  4. Journalists do not understand that truth is not “out there”; that “true” is not empirical (“true” is not revealed by the senses—Kant, Derrida, Rorty).

    So reporters see their jobs as “getting the facts and reporting them,” without realizing that by reporting “The IMF Says X,” the reporter is, in fact, assisting the IMF with construction of truth.

    Herman, Edward S.; Chomsky, Noam. Manufacturing Consent. New York: Pantheon Books, 1988.

  5. I have written many comments to this blog over the years and most of them using American spelling. But that was never intended to be insulting and I very much hope it wasn’t. Actually, when I write a comment here there is a spell check which I always thought was a feature of the blog. But maybe it is just part of my computer, which often seems to do things I don’t know about. But if I write colour rather than color, I get a squiggly red line under colour. Same with realise.

    But I imagine you would be putting a lot more squiggly red lines under a lot more than just the spelling in the IMF report 🙂

    Best wishes Bill. And sorry about the American spelling.

  6. Dear Jerry Brown (at 2023/11/05 at 10:48 pm)

    As a long-time commentator, your input is always welcome, however, you choose to spell.

    The point I was making was that the IMF Report was about Australia and intended for Australian consumption exclusively and I think it was insulting that they could not honour our literature standards.

    The more general point was that it reflected the IMF’s culturally insensitive approach in applying mainstream economics, which thinks that they can articulate a given set of a priori principles from a behavioural starting point, that no sociologist or psychologist would recognise as being application to human society, and then swan into countries and profess to be experts and apply those principles.

    In doing so, they ignore history, culture, customs and fail to appreciate subtlety and nuance.

    All the best
    bill
    ps the spell check is within your browser, it is nothing that I do from my end.

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