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).
Basic principle:
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.
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