{"id":11389,"date":"2010-09-02T17:13:26","date_gmt":"2010-09-02T07:13:26","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=11389"},"modified":"2010-09-02T17:13:26","modified_gmt":"2010-09-02T07:13:26","slug":"the-imf-continue-to-demonstrate-their-failings","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=11389","title":{"rendered":"The IMF continue to demonstrate their failings"},"content":{"rendered":"

\t\t\t\tOn the first day of Spring, when the sun shines and the flowers bloom, the IMF decide to poison the world with some more ideological positioning masquerading as economic analysis. I refer to their latest Staff Position Note (SPN\/10\/11) which carries the title – Fiscal Space<\/a>. I think after reading it the authors might usefully be awarded an all expenses trip to outer space. It is one of those papers that has regressions, graphs, diagrams and all the usual trappings of authority. But at its core is a blindness to the way the world they are modelling actually works. I guess the authors get plaudits in the IMF tea rooms and get to give some conference papers based on the work. But in putting this sort of tripe out into the real policy world the IMF is once again giving ammunition to those who actively seek to blight government intervention aimed at improving the lives of the disadvantaged. The IMF know that their papers will be picked up by impressionable journalists who are too lazy to actually seek a deeper understanding of the way the monetary system operates but happily spread the myths to their readers.
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\nSo already today I read a report in the Sydney Morning Herald (September 2, 2010) – Australia well-placed to handle any shocks: IMF<\/a> – which claims that upon the basis of the IMF paper that:<\/p>\n

\nAustralia is among only a handful of major economies where the government’s budget is best placed to deal with “unexpected shocks”, an International Monetary Fund (IMF) report says …<\/p>\n

In an analysis of 23 advanced economies, the Washington-based institution examined a country’s “debt limit” based on its historical track record and its current debt level, which it describes as the “fiscal space”.<\/p>\n

“Among the advanced economies, Australia, Denmark, Korea, New Zealand and Norway generally have the most fiscal space to deal with unexpected shocks,” the report says.<\/p>\n

But it said these countries must be mindful of future fiscal pressures.<\/p>\n

In contrast, Greece, Italy, Japan and Portugal have the least fiscal space, while Iceland, Ireland, Spain, the UK and US are also restrained in their degree of “fiscal manoeuver”, it said.<\/p>\n

“An absence of fiscal space should not be taken to mean that some form of fiscal ‘crisis’ is imminent, or even likely, but it does underscore the need for credible adjustment plans,” the IMF said.\n<\/p><\/blockquote>\n

The AAP story was published by the SMH at 6.50 this morning so they didn’t waste any time getting in spreading the lies.<\/p>\n

I particularly liked the last sentence in the above quote. The IMF claimed that nations had run out of fiscal space but that didn’t mean that a crisis was about to occur. They know damn well that there will never be a crisis of solvency for governments such as Japan, the UK and the US.<\/p>\n

The SMH report writer didn’t have the acumen to also point out that the comparison between countries that run sovereign monetary systems and countries that are within the Eurozone and have abandoned their sovereignty as a result is invalid at the most elemental level.<\/p>\n

Whether the IMF authors appreciate the difference is another matter. I suspect they do not and have just come through graduate training via a mainstream economics program that fails to provide students with the capacity to actually understand how real world monetary systems operate and the crucial differences that exist between say the EMU and the arrangements that exist in say the US or Japan.<\/p>\n

But the point is that the press uncritically pass this nonsense on to the unsuspecting public and to policy makers within government. It wouldn’t matter if there wasn’t a lot at stake.<\/p>\n

To appreciate what is at stake we just need to think about our Celtic brothers and sisters who are now into their 20th odd month of austerity and the latest data suggests things are getting worse there rather than better. That should come as no surprise but it does provide further real world evidence that should be used in show trials for notable austerians who should be charged with crimes against humanity.<\/p>\n

Here is an interesting Bloomberg report – Austerity Hawks Lose Their Celtic Poster Child<\/a> – that briefly analyses the latest situation in Ireland. I have also been monitoring events there and will probably write a more detailed statistical analysis of what is happening in the coming days.<\/p>\n

Last year I gave a presentation at a UNDP meeting in the US and I recorded my thoughts on the audience reaction and my reactions to other papers presented at the meeting in this blog – Bad luck if you are poor!<\/a>.<\/p>\n

While the main focus of the UNDP workshop was employment guarantees (which is something to be happy about), there was still a lot of talk about fiscal space<\/strong>. Any of the presentations that dealt with macroeconomics (other than my contribution and the contribution of fellow MMT traveller Jan Kregel) introduced the concept of fiscal space as if it mattered.<\/p>\n

The UNDP appeared to be obsessed with the concept and it conditions the way they think about macroeconomics and constrains the way they construct their economic development assistance agenda. I formed the conclusion that the constraints that this erroneous thinking places on their policy vision goes a long way to explaining why there has been no significant increase in standards of living in the poorest nations.<\/p>\n

Countries will never be able to create the requisite number of jobs necessary to fully employ the available labour while they are being advised by “experts” who operate in the mainstream macroeconomic paradigm.<\/p>\n

It is clear that the UNDP constructs its development objectives (including job creation) within a macroeconomic context – see Making fiscal policy working for the poor<\/a>, which is a UNDP publication published in 2004 and that their blighted notions of fiscal space condition their approach to development.<\/p>\n

The IMF<\/a> defines fiscal space as:<\/p>\n

\n… room in a government\u00b4s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.\n<\/p><\/blockquote>\n

You might also like to read this March 2005 IMF paper – Understanding Fiscal Space<\/a>.<\/p>\n

The UNDP has a special WWW Page<\/a> devoted to fiscal space. This document – Primer: Fiscal Space for the MDGs<\/a> – is particularly interesting as it juxtaposes the IMF approach with the approach taken by the UNDP. Perceptive readers will realise quickly that at the heart of the matter there is not much difference at all between the two. So the “higher moral ground” that the UNDP attempts to claim is illusory.<\/p>\n

The UNDP definition (taken from their Primer) of fiscal space:<\/p>\n

\n… is the financing that is available to government as a result of concrete policy actions for enhancing resource mobilization, and the reforms necessary to secure the enabling governance, institutional and economic environment for these policy actions to be effective, for a specified set of development objectives.\n<\/p><\/blockquote>\n

Spot the identical starting point. They both assume that the government has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed. These definitions, despite their subtle differences, could have been written in 1950.<\/p>\n

In a fiat monetary system, these concepts of fiscal space are seriously deficient and completely ignore the main points which are:<\/p>\n