Do as I say, not as I do...., The IMF in practice

www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf

The link is to an IMF working paper. Such papers explicitly say that they should not be reported as representing the views of the IMF. They are quite good at having their cake and eating it too, as we have noted before. Nonetheless the authors work for the IMF and conduct research designed to elicit comment. If research is to have meaning then it must reach conclusions which are founded on facts: so why would you not accept them? To the extent that economics apes science then any dissent from the findings should be based on flaws in the methodology or flaws in the logic. No such flaws are identified in that general disclaimer so it need not detain us.

The paper purports to examine why the implementation of the IMF sponsored policy on what is called "fiscal consolidation" by them; "austerity" by the press; and "the dismantling of civilised society" by me, has not produced the results they expected. This was already identified in earlier work but this paper seeks to consolidate those conclusions. Basically they are saying that their presumptions about the size of the fiscal multiplier were mince. What that means is that they proceeded on the assumption that for every £1 of government spending cuts 50p or thereabouts would come out of the productive economy. If that is right then there is a net saving of 50p and that is how to get out of the debt and deficit problem. If what comes out of the economy is nearer to £1.60, as they now say, then cuts to government spending cannot solve the problem: they make it worse.

The first thing I noticed in reading it was this: they do not give up their underlying theory. According to the introduction, this failure is only likely to be found at the "zero lower bound". This is an excuse we have seen before, and what it essentially means is that "our theory only works when there is no crisis to solve". Now it is perfectly possible that something can work in normal circumstances, yet fail under extreme conditions. That is the claim, it seems. However it is also obvious that none of the folk who buy into this theory knew that it would fail; or under what conditions it would fail; hence it had no predictive value at all. Their explanation is all after the fact. That can happen when a system faces unprecedented circumstances. Unfortunately for that idea, this has already failed in other parts of the world. Over and over again. Indeed, the authors themselves say


I note that this research was only published in 2010: so it might be argued that the information was not available until that time. To which the response has to be "why not?" If they had any idea that the zero lower bound made all the difference to their prescriptions they should have had a look before now: and if they did not then their theory is not a theory at all because it has not considered what happens in a perfectly predictable situation: we know it is predictable because it happened in the 1930's and the parallels with that period are intuitively obvious to the most naive of observers (that's me)

As if that were not enough, there are plenty of economists (and ordinary people) who said that is what would happen, on the basis of an alternative theory. So they should have gone and looked before promoting a policy which was certainly not universally agreed to have the effects they predicted. Reminds me of Icarus. It is not like he was not warned that flying too close to the sun would be a disaster: he is not held up as a model of responsible behaviour, generally. Sadly the difference is that Icarus brought the disaster on himself: whereas the IMF and their friends brought it on the rest of us. They still have jobs and influence, for some reason.

The paper has some other interesting excuses things to say. For example, having found that their ideas about the multiplier are flat out wrong they go on to say that


No shit, Sherlock? Imagine that! Folk who are not sure they will have a job in the future, who are already in debt and are experiencing wage cuts, spend what they actually have to spend and not some pie in the sky idea of what they might get in the future. Whoddathunk?!? Remember that this has come as a surprise to people who stated 3 paragraphs earlier that they found on "rational expectations". I have mentioned before that they have a very peculiar notion of what "rational" means.

Then there is the startling revelation that the multiplier is higher when there is a lot of slack in the economy. Again there are plenty of economists who subscribe to that view on the basis of a different theory, so this was not a new thought propounded in 2012 by fresh research, as they imply.

There follows a self serving wee whine where they say that they compared their own errors with the errors made by other forecasters, and for this purpose they cite the EC and the OECD as well as something called the Economist Intelligence Unit. And they all got it just as wrong. So what can you do, guv? Well you could start by looking at folk who do not derive their forecast from the same theoretical position, perhaps.

Finally, and unsurprisingly we get the usual conclusion: they were right all along, apparently.


To hell with icebergs: full steam ahead, you might say