The IMF: Incompetent, Ideological or Simply Lying?

For years now I have been pointing out the stupidity of introducing austerity in the advanced capitalist world in the middle of an economic crisis. What has put me in a rather fine bit of pique was something that I read earlier this week:

“Sharp spending cuts and tax increases have long played a central role in the International Monetary Fund's prescriptions for governments in financial distress -- most recently for the struggling members of the euro area. Now, officials at the world's primary arbiter of fiscal prudence are recognizing that such austerity can do a lot more damage than previously thought.

[…]The authors [Blanchard and Leigh] focus on a number known as the fiscal multiplier -- the amount a country's economic output changes for each euro of change in government spending or revenue. They estimate that for European austerity measures started in 2010, the multiplier was significantly greater than one, meaning economic output shrank by more than one euro for each euro in deficit reduction. That's much higher than the multiplier of 0.5 that the IMF and other forecasters typically used in 2010 and that had proven more or less accurate in the years before the 2008 financial crisis.

The upshot: Fiscal multipliers can be a lot higher in times of distress than in normal times. The logical conclusion is that Europe's austerity policies were founded on faulty assumptions and should be eased -- something Bloomberg View has advocated. To some extent, that has happened in recent months with the loosening of demands on Greece and with European leaders' tentative discussions of fiscal transfers to stimulate growth in stricken economies (”

My increased level of fury is not due to the admission of incompetence by Blanchard and Leigh, it was not even due to the horrific impact of these policies on so many; heck, it was not even due to the fact that this argument is the only economic policy currently articulated in various forms by all mainstream politicians. It was due to the fact that in reality, the problems are not only due to gross incompetence of an incorrect fiscal multiplier being used, rather the true problem is that mainstream economic analysis is based upon an ideological position favouring private over public sectors and that these authors and all mainstream economists know this and hence the reasons for the failures of the policies are due to that. Moreover, that this admission of incompetence is in fact a lie to cover up the failings of mainstream economic theory deriving from a lack of understanding of the manner in which the capitalist economic system actually functions both in the short run and long run.

To go even further, Blanchard and Leigh are lying, they know damn well what these policies are for, and to pretend that they made a mistake in calculation is an attempt to disguise the true purpose of these policies and those of the economists and politicians that advocate them.

I am wondering if the impunity of economists and politicians and their immunity to prosecution for what they have inflicted on so many is yet another reason for my frustration; the introduction of these policies, the claims that there is no alternative by so many mainstream politicians (all three major parties in the UK), and the lies to stated purpose of these policies demonstrates the crisis in bourgeois democracy clearly as there is no mainstream political party that is willing to abandon neoliberalism and austerity … the need for left-wing unity and the creation of left-wing anti-austerity parties is great and yet breaking through the morass of the political system in many countries is proving almost impossible.

1) What is the purpose of austerity?

Austerity is not a new concept in economic theory and policy. In the context of mainstream Keynesian economic theory it has a rather specific role in recognition of the booms and busts that are an inherent part of the capitalist economic system. Specifically, in the short run, it was meant to cool down an economy in a boom to keep booms and busts not too large. What it does is actually decrease income of working people to slow demand and economic growth to keep booms from being too large. Essentially, it causes a wage squeeze: decreases in government spending and payments lead to increased unemployment and lower incomes for the poor and working class. Since demand is what drives the system in the short-run in these theories, decreases in demand will slow down the economy. It is not meant in the short-run to lead to growth, in fact, the sole purpose of these measures is to contract growth in the economy. Hence, the insistence on the part of David Cameron that you can have austerity and growth is merely a demonstration that he simply does not even understand bourgeois economic theory; that is why they laugh at him in Europe as they know exactly what they are doing. In the context of a capitalist economic system, the introduction of austerity, decreases in government spending, the public sector and decreases in the social welfare state means a decrease in demand, a slowing down of the economic system.

You are probably asking why are mainstream economists and politicians advocating introducing austerity in the middle of an economic crisis. That is an excellent question and that has to do with the long run role of the introduction of austerity.

In the long run, it is meant to shift the imbalance between the public and private sector in favour of the private sector, by decreasing public control over some sectors in favour of privatisation. It shifts, money to the wealthy through tax cuts for the rich on the pretext that in the long-run, what is saved is invested (that is, Say’s Law is supposed to hold in the long-run) and hence that it is supply rather than demand that is the constraint for economic growth in the long run. To say that this is debatable is an understatement; Say’s Law was an assumption in classical economic theory which was incorporated wholesale into neoclassical economic theory and there is little evidence that it holds either in the short or long run. In fact, the idea advocated by many post-Keynesians that capitalism is a demand constrained system clearly holds more weight historically. For the purposes of this discussion what does this mean when we are giving tax cuts to the rich and lowering incomes for the working class and poor? It means a further concentration of wealth and income in the hands of the upper class, nothing more, nothing less and this is justified upon the ideology that it is investment by the wealthy that keeps the system growing in the long run.

But as we know, there is obviously more going on. For that we need to go beyond mainstream economics and look at what it is doing and not what they are saying that they are doing. That has to do with destroying the power of the last bastion of trade unionism (and hence decent wages, work contracts, work conditions and pensions) in the public sector. For the private sector, there is the possibility of actually making profits off of things that are demanded due to privatisation; health care, water, energy, sanitation, education, fire and policing. There are significant problems to this obviously, as the consumers of these services will not have the money income to purchase them privately and in most cases where these services fall into social reproduction, they essentially fall on women to take up the slack in the home. These policies hit women doubly: 1) losing jobs in the public sector; 2) losing benefits which we are more dependent upon and especially for poor and working class women, reprivatisation of social reproduction in terms of care for children, the sick, and the elderly back into the home.

As such, I would argue that Blanchard and Leigh are lying; austerity is working exactly as it was meant to work. It is leading to the deliberate creation of a depression in Spain and Greece due to the destruction of the public sector, it is destroying the social welfare state, creating rising unemployment and it is impoverishing the working class and poor in the advanced capitalist world. The shift in the balance of the economy between public and private is being accomplished and yet we are still in an economic crisis.

So, why is that? What is not happening is that the private sector is leading the way towards economic growth by taking up the control over newly privatised industries and services and increasing output, employment and growth and leading the wonderful free-market system to new heights due to the availability of new sectors of exploitation. This is due to the lack of understanding of why capitalists in the private sector increase investment, employment and hence economic growth in mainstream economic theory which derives from the interrelation between production, consumption and exchange.

2) So what is happening?

In advanced capitalist economies, high levels of productivity in manufacturing and industrial sectors mean less workers are needed relatively and absolutely to produce what is needed for domestic and international demand. This leads to the tendency towards the creation of a reserve army of labour available if needed in case of economic growth; but essentially redundant to requirements of the system. Moreover, since these sectors were highly unionised and workers had far better working conditions, incomes linked to productivity, and decent pensions, it meant that unless growth continued at that level, profits would fall. The decrease in profits in these sectors caused a shift of these industries to underdeveloped and emergent capitalist economies where wages and work conditions were not protected. So, there are two things that led to the rise of persistent unemployment: 1) high levels of productivity; 2) outsourcing to cut both wage costs and costs of raw materials.

Given profitability criteria of the capitalist economic system, the private sector will only increase output, employment and growth if it is perceived that there is sufficient expected demand for an increased amount of goods and services produced. In the absence of that, they will not do so. That is where the public sector’s importance lies:

1) Government purchases of goods and services provide a guaranteed demand for the goods and services produced by the private sector. Uncertainly is eliminated, producers know exactly what the government demands. Cut that and guaranteed demand disappears and economic growth along with that;
2) Given the redundant labouring classes, government benefits provide incomes to those that would not be demanding goods and services. The attempt to replace government benefits with access to easy but expensive credit added additional instability to the system.
3) Government provision of goods and services created jobs in a system in which unemployment is a by-product of how the system worked. This then not only provided essential things to citizens, but also created demand for goods and services produced by the private sector.

So what happens in the context of an advanced capitalist system when you cut government spending and the size of the public sector? The economy shrinks, that is obvious, that was what they were trying to do and that is why the advanced capitalist world is in an economic crisis. So, why, oh why, is it that Blanchard and Leigh are pretending that they made a mistake? Because they are lying and they are doing so to cover up the ideology present in the model and the failures of the mainstream economic model.

And this is not only an issue that is relevant for advanced capitalist countries as we know that the IMF and World Bank have been forcing the same policies of privatisation on the capitalist periphery and have been trying to do this in emergent economies. Again, they are doing so because there is an ideological bias in mainstream economic theory towards the private sector and free market capitalist solutions. The public sector removes areas and sectors of potential profitability from control of domestic and international capital and that cannot be allowed. This is why they advocated creation of free-trade zones owned and operated by MNCs or domestic capitalists serving MNCs and export-oriented production rather than development of domestic resources. This is why privatisation of water, energy, and health care has been so strongly advocated. It has nothing to do with the inefficiency of the public sector; it has everything to do with control over resources and production possibilities by international capital and exploitation of labour and resources in those countries.

Moreover, as is well known, all emergent economies have utilised strong controls over the private sector to be we they are; industrial policy, control over export and import have enabled emergent economies to be emergent. Free market capitalism provides the goods and services that are profitable for it; it does not serve the needs of individuals, it does not guarantee access to clean drinking water for all, access to food for all, access to jobs for all. Its sole purpose is to generate profits and as such skews production away from needs towards what will ensure profitability and continuance of the system.

However, the best laid plans do not always work, and the capitalist system is one that is inherently unstable, its requirements for profitability and continual accumulation of capital lead to inherent tendencies for crises. In fact, what we are seeing now in the advanced capitalist world demonstrate the limits of the internal needs of the system for continual high profits on investment. Capitalism is a demand constrained economy in both the long and short run (contrary to the insistence of mainstream economics). Cutbacks in jobs in the public sector and benefits are leading to the current realisation crisis that the system is facing. What is a realisation crisis? It is a crisis caused by the fact that the capitalists cannot sell their goods and services at a high enough price to realise the potential profits contained in them; in other words, it is generalised over-production (or underconsumption) brought about by insufficient income to purchase goods and services. The only ways out of the crisis in the context of a capitalist economic system is to take the exact opposite approach than that advocated by the mavens of mainstream economics:

1) Increase wages to increase demand;
2) Direct government job creation to decrease persistent unemployment;
3) Increased progressive income tax for the ruling classes, increased corporate taxes (instead of playing beggar thy neighbour by lowering corporate taxes to lure capitalist investment), financial transaction taxes to stabilise the financial system and to shift income towards the poor and working class, and taxes on wealth to start reducing wealth inequality.
4) Finally, resocialisation of privatised industries, creation of nationalised sectors providing water, electricity, healthcare and food production, increased creation of social housing, and spending in public schools, crèches and the provision of services for all; the social welfare state is not only for the poor, it is supposed to be for all classes.


The introduction of deficit reduction in a period of economic crisis has no other purpose except to increase unemployment (due to decreased government spending in the private sector, cuts to employment in the public sector), increase the probability of impoverishment (cuts in benefits to the poor, disabled and unemployed), and to introduce a wage squeeze to prop up profits in periods of no or low growth. Privatisation of public services undermines access to these services, making availability dependent not upon need but upon ability to purchase their services. The concomitant introduction of flexible labour markets as part of these policies lead to loss of job protections, lower wages and undermining of working conditions in an attempt to permanently shift distribution of income in favour of profits and increase exploitation of the working class.

So, to answer the question posed in the title, this is more than incompetence, this is even more than being about an ideological position built into mainstream economic theory. Instead, I would argue that they are lying, what is happening is exactly what was meant to happen and that is the consolidation of an attempt to reverse all the gains of labour since WWII. This is a long-standing re-consolidation of a failed economic ideology whose consequences will be the same as those which led to the great depression; rising income and wealth inequality will lead the system into the next crisis and this is a crisis made by mainstream economists and politicians representing the interests of international capital.




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Thanks for the explanation

geomoo's picture

Invaluable for non-economists like me.  Since you're so steeped in this, you would likely be surprised how informative it is.  This seems a straightforward explanation both of how these these things work leading to an understanding of the motivation underlying behavior of those who set policies in favor of the wealthy.

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Thanks! I literally have been thinking

NY brit expat's picture

of responding to their prevarication and wanted it to be very clear what the purpose of austerity is and why introducing it in a crisis is simply stupid; so the question arises why did they do it and what were they hoping to gain and why would Blanchard and Leigh think that this lie would be believable. I am glad that it is clear,  I am always worried that what I write is incomprehensible. :/

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Reminiscent of Alan Greenspan's "apology" before Congress

geomoo's picture

He admitted to being "partially" wrong for 40 years.  What took Greenspan by surprise?  The fact that, left to their own devices, masters of capital would put their own greed above the well-being of those whose money they were managing.  What a surprise.  As a result of this public admission, as far as i can tell, there has been exactly zero adjustment of public policy.


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Exactly, and attempting to stay ahead of the outrage

geomoo's picture

I had meant to add that, more than anything, both of these "admissions", neither of which will lead to any meaningful change, are indicative of nothing more than just how much obvious damage these policies have created.  Someone felt they had to say something in order to give the impression that, all indicators to the contrary, they still deserved to be trusted.

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Here's another economist admitting a "mistake"

geomoo's picture

The following clip is from the documentary Inside Job.  In it, an economist pretends to remain judicious and objective about his work as the film-maker makes obvious that the "mistake" sprang from wanting to make money.  The author was paid $124,000 for the study which came to the conclusions desired by those paying him.  Later, the name of the study was changed from "Financial Stability in Iceland" to "Financial Instability in Iceland", a fact the economist dismissively chalks up to a "typo".


I had hoped to find a clip of, for me, the most revealing moment in the film.  In it, a brilliant and extremely well-spoken Harvard economist is reduced to sputtering out "Ums" as he is confronted with what appears to him to be a fresh idea--the notion that doing studies favorable to institutions in exchange for money constitutes a conflict of interest.  My point here is that we likely are seeing outright lying in combination with the fact that one should never expect a person to understand something which his livelihood depends on his not understanding.

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