{"id":14050,"date":"2011-04-05T17:29:23","date_gmt":"2011-04-05T06:29:23","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=14050"},"modified":"2011-04-05T17:29:23","modified_gmt":"2011-04-05T06:29:23","slug":"life-in-the-imf-fantasy-world","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=14050","title":{"rendered":"Life in the IMF fantasy world"},"content":{"rendered":"

\t\t\t\tI gave an interview on the national broadcaster ABC about the latest talk in Australia to ramp up the pernicious Work for the Dole program. I noted that the unemployment problem in Australia at present reflects a systematic failure to produce enough jobs rather than the personal failures of the unemployed themselves. Standard stuff. The interview got me thinking of about make work schemes and unproductive labour and boondoggling!<\/a> and leaf-raking. My mind turned, immediately, to the IMF which runs one of the largest make work programs in the world and employs thousands of workers on good pay to do nothing constructive at all. The IMF is the exemplar of leaf-raking. You only have to read their working paper series – where multiple authors attach their name to senseless reports about nothing. These papers are always “Authorized for distribution by x” – that is, some higher-up leaf-raker who spent years learning the craft of being occupied doing nothing. All IMF economists aspire to be the person who sits in the office and authorises for distribution the papers that all the peons pump out which provide nothing useful to anyone. At least aggregate demand is being maintained via the workers’ wages. Pity the IMF couldn’t find something more productive for their workforce to do. Perhaps they are not skilled enough though. Anyway, life in the IMF fantasy world!
\n<\/p>\n

Take for example this IMF Working Paper – An Analysis of U.S. Fiscal and Generational Imbalances: Who Will Pay and How?<\/a> – which has been getting a lot of media attention in the days since it was released (April 1, 2011). Talk about boondoggling!.<\/p>\n

While I jest (yes, Americans – this is what goes for humour where I live – pathetic I know) – the paper is another input into the relentless conservative push to alter the public policy debate away from what matters. It is a sneaky paper because it avoids essential debates that should be thrashed out before any of the matters discussed in the paper are dealt with.<\/p>\n

It adopts a series of implicit assumptions – which are highly significant and contestable – knowing that the average reader and journalist will never question. It does this to render the case they are proselyting more powerful because they know that if these assumptions were ever questioned – and replaced with real world facts – then their case would have zero meaning and zero importance.<\/p>\n

As I said – boondoggling!<\/p>\n

To see how the media report this paper (before I consider it) take this article – IMF economists see dire future for US taxpayers<\/a> – which appeared in the Melbourne Age (April 5, 2011).<\/p>\n

The media report said that:<\/p>\n

\nAmericans will need to pay much heavier taxes and accept less from public healthcare to put state finances on a sustainable track …\n<\/p><\/blockquote>\n

So bad … “much heavier taxes” … “less public healthcare” … “put state finances on a sustainable track”.<\/p>\n

When the reality is that none of the statements that they make from the IMF report can be credibly defended when you get to the bottom of it all. The point is that the journalist writing this up provides no context or critique. Mindless repetition of the IMF press release.<\/p>\n

I know there is a difference between news and comment\/opinion. But the world’s press are not the press offices of specific organisations like the IMF – yet they act as if they are.<\/p>\n

The journalist goes on to outline the “baseline scenario” (higher taxes, public spending cuts targetted at 45-65 year olds) without once mentioning what the baseline scenario assumes. I will come to that in a moment. It is presented in this article as a truth:<\/p>\n

The IMF says it, we don’t question it, you better believe it … (which could be the start of a rap song I might write about the IMF!).<\/p>\n

They keep quoting the IMF about “returning the United States to a fiscally sustainable path” – without telling the reader what that actually would entail other than this jargon:<\/p>\n

\nFully eliminating current deficits and the long-term shortfalls on social plan commitments for the current generation …\n<\/p><\/blockquote>\n

So what are “long-term shortfalls on social plan commitments for the current generation”? Not enough real resources being available? No, that issue – which is the only issue – is never raised in the IMF paper.<\/p>\n

If you understood what the IMF thinks is a “fiscally sustainable path” then you would wonder why anybody bothers to employ these economists.<\/p>\n

The IMF say that unless there is an immediate and permanent 35 per cent in public transfers the “delay in the adjustment makes it more costly”.<\/p>\n

What is their notion of cost? Numbers on bits of paper that some government department produces as a fiscal report once in a while? Cutting transfers immediately and permanently by 35 per cent will be costly … very costly … it will result in many more productive resources lying idle – wasted … that is a huge cost. The IMF doesn’t consider that at all.<\/p>\n

I lose all respect for this type of journalism. The press agencies just become conduits in the neo-liberal propaganda machine and the notion of a free press pales into insignificance. Our political freedoms are then further compromised.<\/p>\n

The Abstract of the paper tells you what it is about. Summarising:<\/p>\n

\n… updates existing measures of the U.S. fiscal gap … applies … generational accounting to establish how the burden of adjustment required to attain fiscal sustainability is shared across generations … U.S. fiscal and generational imbalances are large … under our baseline scenario, a full elimination of the fiscal and generational imbalances would require all taxes to go up and all transfers to be cut immediately and permanently by 35 percent. A delay in the adjustment makes it more costly.\n<\/p><\/blockquote>\n

So my bet is that the journalist didn’t even read the paper – the press release was just taken from the Abstract and propagated as truth into the public debate. Then some politicians who also will never read the paper will start making laws based upon it … and the weak and poor pick up the pieces.<\/p>\n

It reminds me of what I used to think about as a student. I never really prepared much for exams each year preferring to read widely during the year (well outside the prescribed curriculum – because the latter was clearly intent on imparting conservative ideological biases in many of the disciplines I studied). I found that the exams were then not much of a hurdle.<\/p>\n

The alternative, broadly accepted method of examination preparation was to take notes in lectures – which were only partial accounts of what went down in the lectures anyway (I preferred not to take notes during lectures as the alternative). Then as the exams approached I observed students taking pr\u00e9cises of these lecture notes, then further distilling them down into key points, then study cards … end result rote learned nonsense.<\/p>\n

The journalists seem to adopt a similar approach – end result mindless (but damaging) propaganda.<\/p>\n

If you read the IMF paper (I wouldn’t if I wasn’t paid to – in the general sense of being a research academic who claims to be across my field – mainstream literature included) – you will soon get the gist of the intrinsic biases and the lies it perpetuates.<\/p>\n

Lie Number One (first sentence):<\/p>\n

\nThe United States is facing an untenable fiscal situation due to the combination of high fiscal deficits, an aging population and rapid growth in government-provided healthcare benefits.\n<\/p><\/blockquote>\n

No it isn’t (facing an untenable fiscal situation) unless you count the irresponsible austerity push that the conservatives on both sides of politics are enforcing while the progressives … self-absorbed and vacuous – largely go along with while gesturing occasionally that the cuts have to be more equitable or something.<\/p>\n

It is untenable to cut the deficit when the private spending growth is not sufficient to reduce unemployment and support higher real wages.<\/p>\n

But the IMF isn’t concerned about matters of public purpose.<\/p>\n

Their goal is close the “fiscal gap”. What is that?<\/p>\n

In their own words:<\/p>\n

\n… Over an infinite horizon, it measures the adjustment needed for the government to meet its intertemporal budget constraint, so that the present value of the excess of future expenditure and current liabilities over future receipts is zero. It has been argued that when fiscal pressures are concentrated in the long run, as in the United States, using the infinite horizon definition is preferable because finite horizon measures of the gap can underestimate the necessary adjustment …\n<\/p><\/blockquote>\n

In other words, use a flawed measure … then use the version of it that will give the worst result (from the perspective of the flawed logic) … because that will get the report the most media traction and scare mindless politicians the most.<\/p>\n

I use mindless in this context not to imply the individual politicians are dumb – but rather to depict a process where their aims are to garner and maintain power at whatever cost and so they use reports like this (which few of them will be in a position to critique or understand) to further their quest for power. That is mindless and crooked behaviour in my opinion. The poor and the weak pick up the pieces.<\/p>\n

But what does all that jargon mean? Infinite horizons … intertemporal budget constraint … present value of the excess of future expenditure and current liabilities over future receipts … etc<\/p>\n

Nothing of importance or relevance to the US government. It does not have an intertemporal budget constraint. It is the monopoly issuer of its own currency. It can never be financially constrained. It can be politically constrained. All this talk about the Congress closing down governments doesn’t negate my observation that the US government is never<\/strong> financially constrained.<\/p>\n

After all it depends on how you define the “government”. For me, the government has to include those who can make laws regarding fiscal policy. My understanding of the stupidity in the US Congress at present is that they are about to “voluntarily” close the fiscal policy down. That doesn’t mean the US government will be financially constrained. It means the politicians are idiots and don’t have an educated understanding of the monetary system for which they are managing and would be voluntarily enforcing a no spending rule on themselves – the government.<\/p>\n

You can guess that I don’t care much for all the nitpicking over the last year as to whether a national government is truly free of revenue-constraints if it erects voluntary constraints that make it looks as if they are raising revenue, putting it into an account and then spending it once there is a positive balance. Those gymnastics do not alter the fact that the US government or any sovereign government can spend when they choose.<\/p>\n

It also overlooks the fact that the revenue in the accounts cannot (logically) get there prior to government spending in a macroeconomic sense.<\/p>\n

Anyway, back to the IMF paper.<\/p>\n

The IMFs concept of a “fiscal gap” is explained in this extraordinary piece of make-believe:<\/p>\n

\nThe fiscal gap measures, as a present value, a country’s excess of total expenditures (including those arising from its commitments to spend in the future) over available current and future resources. It is commonly defined as the current federal debt held by the public plus the present value in today’s dollars of all projected federal non-interest spending, minus all projected federal receipts. In symbols:<\/p>\n

FGt<\/sub> = PVEt<\/sub> – PVRt<\/sub> – At<\/sub> …<\/p>\n

Where FGt<\/sub> is the fiscal gap at time t, PVEt<\/sub> is the present value of projected expenditures under current policies at the end of period t. PVRt<\/sub> stands for the present value of projected receipts under current policies, and At<\/sub> are assets in hand at the end of period t.<\/p>\n

A non-zero fiscal gap implies that the federal government is violating its inter-temporal budget constraint, meaning that it will not be able to finance its expenditures at some point in the future.\n<\/p><\/blockquote>\n

What does that all mean? The present value is the value you achieve using discounted cash flow analysis on a stream of payments and receipts that span some number of time periods. A dollar today is worth more than a dollar tomorrow is the logic because of compounding. You can invest a dollar today at some interest rate to get more next period. So you have to discount future dollars by some interest rate and number of periods into the future when those dollars might flow to reflect the fact that a dollar today can be compounded over that period. The sum of all these discounted dollar flows is the present value which allows you to make comparisons between cash flows across time.<\/p>\n

Nothing rocket science about that except the area is hugely contested – what discount (interest rate) should one use for example. I have been an expert witness in several cases involving government projects (usually) where the consulting reports or government reports (say from treasuries) manipulate the discount rate to get the result that most suits their political aims.<\/p>\n

As an aside, my testimony on behalf of a community group fighting the privatisation of their regional hospital was declared inadmissible by a court hearing the case after some days of legal battle because I had based my report on a leaked treasury document. The analysis in that document was fraudulent and, in part, involved the manipulation of discount rates. There was never any way the privatisation could be justified on economic grounds. But the hospital was privatised (community group lost) and not long after that the private company went broke (as predicted) and the government was forced to take over the hospital again. At the case, there was all this neo-liberal blather about the risk being shifted to the more efficient private sector. The risk was never shifted. It was a total fraud.<\/p>\n

Anyway, I digress. What the statement by the IMF amounts to is this:<\/p>\n

1. They invent some constraint on government net spending that has to hold infinitely – the “inter-temporal budget constraint”. In this case they claim the budget has to be balanced to satisfy this constraint. <\/p>\n

2. They then claim that if it doesn’t balance the government will be insolvent – “it will not be able to finance its expenditures at some point in the future”. <\/p>\n

3. They then do some manipulations of revenues and spending to solve the model so that it does balance in present value terms. This solution is declared fiscally sustainable and delivers the tax rises and spending cuts.<\/p>\n

The first question a half-intelligent primary school child would ask is “what is this inter-temporal budget constraint”? A person who understands the reality as opposed to the graduate school indoctrination would reply – how can the government who issues the currency be constrained by not having enough of it.<\/p>\n

It is impossible for the government to run out of its own currency. The concept of a fiscal gap is thus based on a false premise which leaves it meaningless.<\/p>\n

Why should the budget ever be in balance? Regular readers will know that the purpose of the government is not to balance a budget. What meaning does that goal have? It is just an accounting statement. It might be appropriate to balance a budget at some times over the next 20 or 30 or 100 years (see below about the 100).<\/p>\n

It might be that the external sector will achieve a continuous balance over the next 100 years and the private domestic sector will be in balance over that time span (both in present value terms) and that the level of aggregate demand that would then emerge if the government balance was zero was consistent with full employment.<\/p>\n

If that set of outcomes occurred then a budget balance would be fine (as long as the public-private mix of demand was considered appropriate) and the growth rate of nominal spending was being absorbed by real output growth.<\/p>\n

But I have never seen any country which would satisfy that condition in the history of available data.<\/p>\n

The US ran continuous and variable deficits for years and years (they are the norm). It has never had any of its cheques bouncing although clearly prior to 1971 the government did have to fund its spending. Since 1971, the IMF world has not existed!<\/p>\n

The real goal of government is to run budget outcomes that support aggregate spending at appropriate levels. Unemployment is a real cost, a budget deficit is not!<\/p>\n

The IMF paper only considers unemployment in terms of the payments associated with income support. It doesn’t recognise that unemployment reflects a spending gap and imposes massive costs in the form of lost real income. These are the costs that span the generations that government should be mindful of.<\/p>\n

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I note that I don’t like or dislike budget deficits. I only know that history tells me that for most nations they are required as the normal situation if real economic growth is to be sustained and the private sector (overall) is not burdened with ever increasing debt accumulation.<\/p>\n

The recent crisis has been, in part, the result of neo-liberal policies that thought nations could sustain growth based on such increases in private indebtedness. That is one lesson we should have learned. Unfortunately, the conservatives have diverted attention and think that public debt is the issue. In doing so, they are setting the world up for the next crisis. Given that the residue of this crisis will remain for a long time, the next crisis will build on that residual.<\/p>\n

I won’t even go into an analysis of the “generational accounting” literature here. It is another one of those comical diversions that mainstream economists have indulged in which asks the question:<\/p>\n

\n… if policy remained as it is for current generations for the rest of their lives, how much would they pay in net taxes and how much would future generations pay?\n<\/p><\/blockquote>\n

Oh yes, to balance the budget! The framework assumes that “all net liabilities transferred forward must be paid for eventually”.<\/p>\n

As a description of the fiscal policy process it is laughable. It completely overlooks the reality that fiscal policy is a year to year proposition – as it should be – seeking to stabilise aggregate demand at high levels of activity in the face of fluctuations (sometimes large) in private spending.<\/p>\n

Governments do not act as infinite entities. Taxes are not set to balance the net present value of the budget at zero. This framework is used by economists because they can use – what they think of as – some fancy mathematics – which allows them to fill their days in better. If you ask a mathematician what they think of the standard maths used by economists and you will have to wait for them to stop laughing before you get their very short, one or two word, opinion.<\/p>\n

Deficits are never paid back!<\/p>\n

Public debt associated with deficits (under current arrangements) is in a macroeconomic sense never paid back (or rarely)!<\/p>\n

This is not to say that today’s deficits do have implications for the future generations. Clearly, if the government maintains strong economic growth (that is environmentally sustainable) and encourages high productivity (which supports high real wages growth) and low unemployment, the future generations will be better off than otherwise.<\/p>\n

Governments that maintain high quality health care and public educations systems will set in place the conditions for future prosperity.<\/p>\n

Conversely, governments that allow mass unemployment to become entrenched and cut back public service delivery and public infrastructure development impose significant real costs on future generations. Most governments are in that mode at present. The IMF policy agendas (seeking to impose pro-cyclical fiscal policy regimes on the advanced nations) would worsen the real burden that our children and grandchildren will bear.<\/p>\n

The only good thing that the IMF paper delivers is that in their “generational accounting” exercise they:<\/p>\n

\n… assume that each individual lives for 100 years.\n<\/p><\/blockquote>\n

That is neither an infinite-horizon nor approaching life-expectancy rates in the advanced world. But those issues aside, it would be good it just that little part of the analysis turned out to be true. I can see myself as a white-haired centurion hanging down the beach!<\/p>\n

Conclusion<\/strong><\/p>\n

The IMF paper is a glowing example of why mainstream economics has failed. It starts with a lie … does some flawed analysis upon the basis of those lies … and concludes … nothing of importance. A supreme example of boondoggling!<\/p>\n

Competing for today’s blog space was the comments overnight by Alan “I’ve been very distressed by that fact … I was a mindless ideologue” Greenspan. They will be cherished by all for years to come. Some will say they must be the signs of senility (they were so bad). But I have dealt with the economics profession all my professional life … indeed I am part of it … and that is the way they think and talk. More later on that.<\/p>\n

That is enough for today!<\/p>\n","protected":false},"excerpt":{"rendered":"

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