In a stunning reversal for an organization that rests at the bedrock of the modern “neoliberal” (a term the IMF itself uses generously), aka capitalist system, overnight IMF authors Jonathan D. Ostry, Prakash Loungani, and Davide Furceri issued a research paper titled “Neoliberalism: Oversold?” whose theme is a stunning one: it accuses neoliberalism, and its immediate offshoot, globalization and “financial openness”, for causing not only inequality, but also making capital markets unstable.
To wit:
There are aspects of the neoliberal agenda that have not delivered as expected. Our assessment of the agenda is confined to the effects of two policies: removing restrictions on the movement of capital across a country’s borders (so-called capital account liberalization); and fiscal consolidation, sometimes called “austerity,” which is shorthand for policies to reduce fiscal deficits and debt levels. An assessment of these specific policies (rather than the broad neoliberal agenda) reaches three disquieting conclusions:
- The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries.
- The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.
- Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.
Wait… you mean that the IMF becoming, gasp, Marxist? Did last summer’s dramatic interaction with Greece and its brief but memorable former Marxist finance minister, Yanis Varoufakis, leave such a prominent mark on the IMF’s collective subconsiousness, that it is now overly rejecting the tenets on which the IMF was originally founded?
Let’s read on for the answer.
Here is a very notable segment on “globalization” aka financial openness:
In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality. Moreover, the effects of openness on inequality are much higher when a crash ensues .
It gets better:
The mounting evidence on the high cost-to-benefit The mounting evidence on the high cost-to-benefit ratio of capital account openness, particularly with respect to shortterm flows, led the IMF’s former First Deputy Managing Director, Stanley Fischer, now the vice chair of the U.S. Federal Reserve Board, to exclaim recently: “What useful purpose is served by short-term international capital flows?” Among policymakers today, there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to—or compound—a financial crisis. While not the only tool available—exchange rate and financial policies can also help—capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad.
The IMF then goes full-Magic Money Tree and reverts back to a mode first observed several years ago when it said that not only is austerity bad, but that unlimited debt issuance is probably good.
Markets generally attach very low probabilities of a debt crisis to countries that have a strong record of being fiscally responsible. Such a track record gives them latitude to decide not to raise taxes or cut productive spending when the debt level is high. And for countries with a strong track record, the benefit of debt reduction, in terms of insurance against a future fiscal crisis, turns out to be remarkably small, even at very high levels of debt to GDP. For example, moving from a debt ratio of 120 percent of GDP to 100 percent of GDP over a few years buys the country very little in terms of reduced crisis risk.
But even if the insurance benefit is small, it may still be worth incurring if the cost is sufficiently low. It turns out, however, that the cost could be large—much larger than the benefit. The reason is that, to get to a lower debt level, taxes that distort economic behavior need to be raised temporarily or productive spending needs to be cut—or both. The costs of the tax increases or expenditure cuts required to bring down the debt may be much larger than the reduced crisis risk engendered by the lower debt. This is not to deny that high debt is bad for growth and welfare. It is. But the key point is that the welfare cost from the higher debt (the so-called burden of the debt) is one that has already been incurred and cannot be recovered; it is a sunk cost. Faced with a choice between living with the higher debt—allowing the debt ratio to decline organically through growth—or deliberately running budgetary surpluses to reduce the debt, governments with ample fiscal space will do better by living with the debt.
Of course, what both the IMF and the Magic Money Tree lunatics fail to grasp, is that the only reason debt interest hasn’t exploded in a world that has never had more debt (a process that inevitably ends in war) is thanks to central bank monetization of said debt, and third party investors frontrunning said central banks. Let’s revert to the “low costs of debt” if and when runaway inflation forces central banks to reverse what has been a 30+ year process that started with the great moderation and will end either with helicopter money (and thus hyperinflation) or central banks owning every single assets (and thus the death of capitalism.
But back to the IMF’s rant, just in case the IMF’s dramatic U-turn on its support for a neoliberal agenda was not clear, here is another reiteration:
In sum, the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed. In the case of financial openness, some capital flows, such as foreign direct investment, do appear to confer the benefits claimed for them. But for others, particularly short-term capital flows, the benefits to growth are difficult to reap, whereas the risks, in terms of greater volatility and increased risk of crisis, loom large. In the case of fiscal consolidation, the short-run costs in terms of lower output and welfare and higher unemployment have been underplayed, and the desirability for countries with ample fiscal space of simply living with high debt and allowing debt ratios to decline organically through growth is underappreciated.
The IMF’s punchline:
[S]ince both openness and austerity are associated with increasing income inequality, this distributional effect sets up an adverse feedback loop. The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting. There is now strong evidence that inequality can significantly lower both the level and the durability of growth.
And here is the IMF doing the unthinkable, and waving to Marx:
The evidence of the economic damage from inequality suggests that policymakers should be more open to redistribution than they are.
As a reminder, this is taking place just days after the St. Louis Fed admitted the Federal Reserve itself is, indirectly, a primary reason for the current record wealth inequality thanks with its focus on the “wealth effect” and boosting asset prices.
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What is the conclusion from all this? Perhaps that the push for global wealth redistribution, and an end to conventional capitalism, is in the works.
How this transition takes place is unknown: whether by government decree, by regime change, by a – paradoxically – global government (one in which the IMF would be delighted to administer global monetary policy) to rein in globalization, or simplest of all, by helicopter money, is still unclear.
Whatever it is, something is coming, because for a stunning paper such as the one below to be published, it certainly had to be vetted not only at all executive levels of the IMF, but was surely preapproved by all legacy financial institutions.
And that should be the basis for great concern.
Here is the original IMF paper “Neoliberalism: Oversold?” (IMF)
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