I’m referring to a recent article by two IMF authors: Olivier Blanchard and Daniel Leigh.
Bill Mitchell (Australian economics Prof.) has for years claimed that the IMF is not fit for purpose and should be closed down. I agree.
And support of a kind for Bill (thought not actually advocating the abolition of the IMF) comes from Jonathan Portes, director of the UK’s National Institute of Economic and Social Research. He lists a number of organisations which “got it completely wrong” on “economic issues”. And he includes in that list, the “European Department at the IMF”.
In their first sentence, Blanchard and Olivier (B&O) claim, “In many advanced economies, public debt is very high, and fiscal consolidation must take place. Some factors point to doing more now, others to doing more later. Our purpose in this article is to identify these factors.”
Well there is a whapping great piece of false logic in the first sentence, namely the assumption that because something has recently expanded, it must be too large.
Public sector investment in the UK has declined over the last two years. That of itself does not prove that public sector investment is too low (although my guess is that it probably IS TOO low). Anyone with a brain who tries to prove that X is too low (or high) normally sets out formulas, principles or theories which show what the OPTIMUM amount of X is.
For example, it could be argued that investment in roads and rail in the UK should be determined by purely commercial criteria. That is a “formula” or “principle”.
So what principles, formulas, etc do B&O set out for determining the OPTIMUM level of debt or deficit. The answer is NONE!!!!!
Instead, they set out a series of factors that allegedly influence the decision as to whether to “consolidate” earlier rather than later. But none of that is of any relevance.
The optimum amount of debt.
Anyway, here’s an idea as to what the OPTIMUM amount of debt should be. To be more accurate I’ll set out a suggestion as to what the optimum TOTAL of debt and monetary base should be, because those two are little different in nature: in particular, both are net financial assets as viewed by the private sector. Moreover, one can easily be turned into the other as indeed has occurred on a large scale recently in the guise of QE.
To summarise, its “private sector net financial assets” (PSNFA) that is the central concern (as has long been obvious to advocates of Modern Monetary Theory).
The optimum amount of PSNFA is the level that induces the private sector to spend at a rate that brings full employment.
In other words if the private sector thinks it has an inadequate supply of PSNFA it will save, and we get “paradox of thrift” unemployment. On the other hand if PSNFA is too high, we get excess spending and hence excess inflation.
And that basic principle renders 90% of B&O's arguments superfluous.
To illustrate, if the private sector is going to want to keep its increased stock of PSNFA for the next five years, there is not point in any consolidation for the next five years. And given the way various private sector entities got their fingers burned in the recent crises, it’s quite possible the private sector DOES ADOPT that relatively conservative approach.
Conversely, the private sector may have a fit of irrational exuberance in three years time, in which case it will be necessary for government to confiscate some PSNFA via extra tax (and/or cut public spending). In other words, if we have to use that ghastly word “consolidate”, then government will need to consolidate.
In short, trying to determine in 2013 what consolidation a government ought to do in each of the next ten years, which is what the IMF authors attempt, is a complete waste of time.