The IMF published two important press releases yesterday. One looked at the summary and findings from its bi-annual update of its Fiscal Monitor, and the other is it’s World Economic Outlook. Here are the press releases showing the transcript of the briefings:
I read both – and found some interesting points in both. First the Fiscal Monitor.
It’s great that the IMF is promoting “four pillars of fiscal rectitude” to the world. They are as follows:
- [government] “budget revenues should be mostly derived from broad based taxation, backed by strong compliance.”
- “improving the efficiency of spending, including energy subsidy reform, continues to be a priorities and can also facilitate fiscal adjustment. That is also clearly the case in core areas for sustainable and inclusive growth such as public investment, health, and education.”
- “it is important to put in place fiscal frameworks that help countries save during good times so they can protect spending during bad times.”
- “the quality of institutions is crucial. Fiscal rules and procedures are important but they need to be underpinned by a broader social and political commitment to adhering to these rules and laws.”
It is 2016 and the global economy is in a pickle, and a unique one at that. And this is what we get from the IMF. Don’t get me wrong, these are good rules or goals. But honestly, is this what we need from the IMF at this juncture? Seriously, pillar three is not unlike the following: “Hey fella, I see your house is burning down. You know what, I suggest you don’t leave lighted cigarettes around the house when you go out. OK?”
In some ways these pillars state the obvious and restate what has been stated by the IMF and others before:
- Spend within your means (don’t ratchet up debt you can’t afford)
- What you spend should add value to the growth drivers of the economy and not pander to non-value-add political or pet projects
- Save for a rainy day (not useful when it’s raining, though)
- Only borrow or lend to reputable, trustworthy, reliable folks and companies.
The advice is not much use, and it’s dated, and it’s incomplete anyway.
First, what use is this advice? Ask yourself this- for whom is the advice targeted? Central bankers? Well they don’t control government spending, politicians do. They don’t control debt limits, politicians do. Central bankers don’t regulate how businesses and people operate (actually there is a little of this I admit).
So is the IMF advising politicians? What use is that? Politicians don’t really listen to the IMF until, and only then, if their house has virtually been destroyed. Politicians gleefully set policy on top of policy to shamelessly develop the art and science of politics. To assume that, for example, what has gone on in the USA in recent years, concerning fiscal and monetary policy and tax and regulation, is for the betterment of the economy, is wrong. Politicians get in the way of good, sound, economic policy. They have other priorities such as re-election and pets.
Politicians do not control taxes for the betterment of the economy – they do so for the betterment of politicians. So firstly the IMF advice is not that helpful since we don’t know who it is for not who might be able to exploit, rationally, such advice.
The advice is dated: it’s old and not new. In fact these principles are what your mom told you when you were growing up. It’s what great grandma and grandpa told them when they were kids. Anyone with an ounce of home economics gets this stuff. And if you are responsible to yourself, this advice is normal. If you are responsible to an electorate, this advice is forgotten and ignored. This advice does not make for good politics even though its good advice for economies.
This advice is also complete. The IMF has the right idea but does not go far enough. Fiscal and monetary policy, coupled with regulatory guidance, under conditions of uncertainty, need more than anything else, policy coordination. Uncertainty breeds distrust. This leads to a beggar thy neighbor behavior and can lead to any number of race-to-the-top (or bottom) for any number of polices. Currency Exchange is one current and excellent example. Quantitate easing (QE) is another. The list goes on.
The IMF should remember its roots and call for a second Bretton Woods. We need another extensive level of cooperation to guide exchange rates and interest rates around the world. We need to ensure we do not allow for the beggar thy neighbor policy setting. China needs to be at the table, as do some EM’s. Bretton Woods was a global project, and it worked for a good amount of time. It delivered on its prime motive for stabilizing the global economy so that the invisible hand could get back to pumping growth.
This is the fifth pillar: this is the most important, missing pillar.
In the World Economic Outlook summary there was a perfect quote, which is shown here:
“Mr. OBSTFELD: I described some of these in my opening remarks. I think there are a large number of areas where cooperation among countries is needed to reach solutions; for example, the global safety net, IMF quota reform, cooperation in the regulatory sphere, all of which would enhance resilience.”
The IMF knows what needs to be done. They need to take action.