In the last month or so, we have seen the IMF publish material that is critical of what they call neo-liberalism. They now claim that the sort of policies that the IMF and the OECD have championed for several decades have damaged the well-being of people and societies. They now advocate policy positions that are diametrically opposite their past recommendations (for example, in relation to capital controls). In the most recent OECD Economic Outlook we now read that their is an “urgent need” for fiscal expansion – for large-scale expenditure on public infrastructure and education – despite this organisation advocating the opposite policies at the height of the crisis. It is too early to say whether these ‘swallows’ constitute a break-down of the neo-liberal Groupthink that has dominated these institutions over the last several decades. But for now, we should welcome the change of position, albeit from elements within these institutions. They are now advocating policies that Modern Monetary Theory (MMT) proponents have consistently proposed throughout the crisis. If only! The damage caused by the interventions of the IMF and the OECD in advancing austerity would have been avoided had these new positions been taken early on in the crisis. The other question is who within these organisations is going to pay for their previous incompetence?
The OECD then …
In the – Economic Outlook, Volume 2011 Issue 2 – the world economy was in dire straits and the OECD thought that “a sustainable structural adjustment to raise long-term growth rates” (p.8) was necessary.
This would entail “fiscal consolidation” and “structural policies” that would raise world output “by as early as 2013”.
We were told that a:
… a wide range of structural measures, which are desirable in their own right, will become urgent. While priorities vary from country to country, such policies include the removal of barriers in product and labour markets … ” – aka cutting wages and creating a free-for-all for capital!
The OECD also chose to perpetuate the narrative that “stronger fiscal frameworks should be adopted to reassure markets that the public finances can be brought under control”.
This was at a time when bond yields were falling sharply in most nations as bond investors couldn’t get enough government debt to satiate their desire for risk-free assets.
It was an absurd narrative. And as we have now seen, some 5 years later, many nations are now issuing long-term public debt at negative rates and there is no shortage of demand for these financial assets – that is, ‘investors’ are stumbling over themselves to pay the government to borrow of them.
In the – Economic Outlook, Volume 2012 Issue 1, the OECD claimed that “structural reforms could play a major role in speeding up adjustment and boosting growth and thereby fiscal sustainability” (p.12).
They were also pushing the line that there was a need to maintain the “current accommodative monetary policy settings in the United States and Japan, and a further easing in the euro area” (p.12).
In the – Economic Outlook, Volume 2013, Issue 2, not much had changed. Growth was still floundering and the OECD thought that cutting wages and deregulating would help.
They claimed that “reforms to labour and product markets, including liberalisation of services in Germany … would strengthen and rebalance demand” (p.8).
They said in relation to Japan that the “increase in the consumption tax to 8% is welcome and should be followed by a further hike as planned in 2015”.
They urged the Japanese government to get back into “primary budget surplus” with a “more detailed and credible fiscal consolidation plan”.
We know what happened to Japan when the sales tax went up! Please read my blog – Japan returns to 1997 – idiocy rules! – for more discussion on this point.
In its – Economic Surveys Spain – September 2014 – the OECD was urging the Spanish government to “return to a cyclically-adjusted fiscal balance by 2017” despite there being in excess of 24.6 per cent at the time.
They claimed that the “consolidation measures need to be implemented to avoid more costly adjustments in the future” even if they undermine real GDP growth.
Their partners in crime, the European Commission had previously refused to alter the methodology for calculating so-called ‘structural deficits’ in the Eurozone, which would have reduced the austerity being imposed on Member States.
The so-called ‘Output Gaps Working Group’ within the EC had informed officials in 2013 that deficits in the Eurozone were mostly structural in nature rather than cyclical – which means they believed that the Member States were close to ‘full employment’ at the time.
One report said that:
… some of the bloc’s weakest economies are operating relatively close to full capacity … For example, the latest commission estimate is that the Spanish gap is just 4.6% of gross domestic product, despite nearly 27% of Spain’s labor force being officially unemployed … The commission believes that the “natural” rate of unemployment — if the Spanish economy were operating at full potential — is 23%.
The OECD estimates of the output gap for Spain (upon which these flawed measures of ‘full employment’ are based) kept being altered as the crisis unfolded.
By the time the crisis hit in 2008, the Spanish government’s fiscal balance went from a 1.9 per cent surplus (2007) to a 4.5 per cent deficit (as a % of GDP).
At that point, the OECD was still claiming the economy was operating above full capacity, given its estimate of the structural deficit was 5.7 per cent – that is, the cyclical component of the 4.5 per cent deficit outcome was a positive 1.2 per cent.
Between the end of 2007 and the end of 2008, the Spanish national unemployment rate moved from 8.8 per cent to 14.9 per cent. Thus, the OECD was estimating that the complete rise in Spanish unemployment over that year was structural in nature and that the full employment unemployment rate had risen to at least 14.9 per cent.
What possible explanation could emerge to suggest that the economy was still producing above its potential?
There was no explanation for the OECD or the European Commission’s estimates other than that they were an application of the ideological bias within the organisations – the neo-liberal Groupthink – that saw them fudge so-called economic analysis to suit their desired end.
The lack of internal consistency with all these estimates at the time beggared belief.
I wrote about that sordid piece of OECD history in this blog – The confidence tricksters in the economics profession.
Take Estonia for example. I read an interesting account of inequality in Estonia yesterday (see below) and decided to update my databases for this nation to see what was going on. No surprises really. It is an economy that has been ravaged by the austerity mindset of the Eurozone and it has porous borders which have relieved some of the costs of this misguided policy stance.
The OECD narrative about Estonia expressed in its – Employment Outlook 2015 – is that “The economic crisis had deep impacts on the Estonian labour market, but the recovery has been equally remarkable”.
Its – Economic Survey of Estonia 2015 – praised the nation’s alleged “growth-friendly business environment”.
The Survey also praised the Government’s plans to maintain fiscal surpluses as being “strong” and “prudent” despite also identifying that “a catching-up economy like Estonia has high public spending needs to sustain productivity growth and ensure equity” yet urging the Government to cut taxes.
These endless inconsistencies appear often in IMF and OECD reports. They know damn well that running fiscal surpluses in most cases is bad for growth and employment and they can see the results for themselves – low productivity, low skill development, increased inequality and poverty – yet they cannot break out of the fiscal surplus mantra to save themselves.
The reality is that the Estonian labour market has not particularly improved – unless exporting people to other nations to ease the pressure of a declining employment base is improvement.
The facts as at June 2016 are:
1. The labour force is now 2.3 per cent lower than it was in 2007.
2. Total employment is 4.2 per cent lower than it was in 2007.
3. Unemployment is 37.8 per cent higher than it was in 2007.
4. Between 2007 and 2014, 14,198 people (net) migrated out of Estonia around 0.3 per cent. The overall population as at 2016 is now 26,976 (2.1 per cent) than it was in 2007.
5. At the height of the recession, real GDP fell by 20.3 per cent (September-quarter 2009). By the December-quarter 2015, real GDP had still not returned to the peak level prior to the crisis (December-quarter 2007). Real GDP growth is now slowing sharply and heading towards zero.
6. Inequality has risen to be the worst in Europe.
According to an article in the Baltic Times (June 4, 2016) – Ossinovski: Inequality in Estonia now the most prevalent in Europe:
Inequality in Estonia has become more widespread than in any other European country … This means that in the past five years the fruits of Estonia’s economic growth have gone disproportionately to the more well-off people.
As is typical these days, the leader of the Estonian Social Democratic Party (SDE) Jevgeni Ossinovski, which is a “junior government party” claimed that “that growth in inequality is a global trend which has to do with the development of technology”.
This is another one of those Left delusions that exempt them when in power of responsibility. If a politician can blame an external factor, particularly one that is as amorphous as technological change, then they can avoid the obvious policy responses.
Estonia could reduce its inequality relatively quickly if it set about improving the labour market with public sector job creation schemes at socially acceptable wage levels. As sure as the people accepted the jobs, the inequality would decline!
Simple as that!
I could go on and provide a more detailed textual analysis of OECD literature over the last 7-8 years. It would lead one to umabiguously conclude that the OECD had become a neo-liberal agency.
Please read my blog – OECD predicts that pigs will fly – for more discussion on this point.
The UK Guardian article (May 29, 2013) – The OECD’s deficit fetishism will stunt growth – when all we need is houses – concluded that the OECD was:
Tied in a straitjacket of its own making, it only whispers how some of its 34 member countries might implement a series of technical measures, which it meekly says may provide support for jobs and growth “at the margins” …
… the OECD, while talking loudly and often about its concern for jobs and small businesses, remains obsessed with reducing the annual budget overspends by indebted government to the exclusion of all else. That’s where its fatalism lies. Deficits must continue to fall until they are balanced and for that reason growth will be slow.
The OECD and the IMF have seemingly been in a a race as to which organisation can produce the most inaccurate forecasts.
There is one rule of thumb that you might do well to remember – when the OECD says something you can generally conclude it is wrong and probably the opposite is the correct position.
Both these organisations – the IMF and the OECD – were created to serve roles that are no longer relevant. The IMF was at the heart of the convertible currency system which was abandoned in 1971. So they had no relevance after that and the reincarnation has seen them become a neo-liberal heartland. It is now a pernicious, regularly wrong, highly damaging institution.
The OECD roots lie in the post World War II Marshall Plan to reconstruct Europe. The Organisation for European Economic Cooperation (OEEC) was established in 1948 to supervise the implementation of that Plan.
It was considered important to form a co-operative European-wide agency that would ensure employment was high and living standards were increasing.
The OECD emerged out of the OEEC and was formally established in 1961 with swathes of funding from the advanced nations. It was a Keynesian organisation.
Now its policy positions leads to the destruction of jobs, the degradation of working conditions for those who keep their jobs, and the reduction in living standards and the rise in poverty. In that sense, it has gone from being a highly progressive and important institution in rebuilding economies to an incompetent bastion of neo-liberalism.
As I have noted in the past, if there were any areas that governments can cut spending with little harm then it is in the support they give to the IMF and the OECD. I would withdraw all funding to these agencies and let them die in their own hubris and incompetence.
The OECD now …
It is a good thing when organisations (or people) change in the face of incontrovertible evidence that their previously held positions were wrong and in contradiction of the facts.
But one has to be deeply cynical when these neo-liberal attack dog institutions such as the OECD and the IMF start changing tack – in a diametric fashion – with the same senior officials still in charge.
Simple justice would suggest that the executives of these organisations should resign forthwith as recognition of the damage their organisations have caused by bullying governments into policy implementation that were never consistent with any reasonable interpretation of what was going on.
Modern Monetary Theory (MMT) has maintained a consistent position throughout the crisis. Indeed, the original developers were consistently saying in the 1990s that the private credit explosion would come unstuck and cause a major recession.
MMT has also maintained a consistent anti-Eurozone line pointing out that the flawed design of the monetary union, which reflected the dominant Monetarist-neo-liberal ideology, would lead to chaos when the cycle turned down – it was only a matter of time.
The solution to the crisis then is the same as it is now – with private spending weak, the government sector has to run deficits large enough and long enough to ensure that total spending is sufficient to maintain sales at levels consistent with full employment.
The size of the public deficits should never have been a policy target or a topic of conversation. The goal should never be some particular deficit target but rather ensuring people have access to jobs and stable incomes.
The neo-liberal era of which the OECD has been a major part distorted the public’s understanding of these things and elevated the fiscal balance to a status it never deserves. It became a goal in itself and spurious analysis was presented to give authority to the notion that surpluses were good and deficits were bad.
The long-drawn out crisis is a direct result of this spurious analysis and application.
Now it seems there is some movement at the station (colloquially meaning – shift in position).
I reported on the signs that elements within the IMF have shifted position in this blog – Iceland proves the nation state is alive and well.
Specifically, the June 2016 (Vol 53, No.2) edition of its in-house journal Finance and Development carried an article – Neoliberalism: Oversold? – which has been attracting attention across the media since it was pre-released last week.
In that article, the IMF authors (who did the earlier research on capital controls referred to above) basically eschewed the notion that self-regulating markets – the catchcry of the free market lobby – deliver optimal outcomes.
They define neo-liberalism as resting “on two main planks”:
The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition. The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.
These are the sort of policies that the IMF and the OECD have championed for several decades now without evidence that they actually help advance the well-being of people instead of concentrating income growth at the top end of the distribution (rising inequality).
Now, the IMF authors admit that “the neoliberal agenda … [has] not delivered as expected”, particularly in the area of free capital flows and “austerity” (aka “fiscal consolidation”).
Who would have thought!
They now reach “three disquieting conclusions” in relation to this agenda:
– 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.
They also conclude that:
Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment … In sum, the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed.
Madame Lagarde is yet to concur that she agrees with the assessment of her underlings. But this document suggests, at the very least, that there is considerable tension within the IMF as to what the organisation stands for.
The recent UK Guardian article (June 1, 2016) – Why the global economy may need to get worse before it gets better – suggested that:
A wind of change is howling through the world’s economic institutions. Last week it was the International Monetary Fund saying that austerity could do more harm than good and that neoliberalism was not all it was cracked up to be. This week it is the turn of the Organisation for Economic Cooperation and Development to challenge the orthodoxy.
So the race to be more ‘Keynesian’ seems to be on at present between the IMF and the OECD.
The latest – OECD Global Economic Outlook – published June 1, 2016 concluded that:
The global economy is stuck in a low-growth trap that will require more coordinated and comprehensive use of fiscal, monetary and structural policies to move to a higher growth path and ensure that promises are kept to both young and old …
The OECD chief economist (so getting to the top) wrote the editorial to the Outlook – Policymakers: Act now to break out of the low-growth trap and deliver on our promises and said:
The prolonged period of low growth has precipitated a self-fulfilling low-growth trap. Business has little incentive to invest given insufficient demand at home… by 2017, 39 million people will still be out of work, almost 6.5 million more than before the crisis … Muted wage gains and rising inequality depress consumption growth. Global trade growth, at less than 3 per cent on average over the projection period … Negative feedback-loops are at work. Lack of investment erodes the capital stock and limits the diffusion of innovations …
The low-growth trap is not ordained by demographics or globalization and technological change. Rather, these can be harnessed to achieve a different global growth path – one with higher employment, faster wage growth, more robust consumption with greater equity. The high-growth path would reinvigorate trade and more innovation would diffuse from the frontier firms as businesses respond to economic signals and invest in new products, processes, and workplaces …
And the solution?
The OECD now claim that:
Fiscal policy must be deployed more extensively, and can take advantage of the environment created by monetary policy … OECD research points to the kind of projects and activities that have high multipliers, including both hard infrastructure (such as digital, energy, and transport) and soft infrastructure (including early education and innovation). The right choices will catalyse business investment, which, as the Outlook of a year ago argued, is ultimately the key to propelling the economy from the low-growth trap to the high-growth path …
The need is urgent.The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, revive market forces, and boost economies to the high-growth path. As it is, a negative shock could tip the world back into another deep downturn. Even now, the consequences of policy inaction have damaged prospects for today’s youth with 15 per cent of them in the OECD not in education, employment, or training; have drastically reduced the retirement incomes people are likely to get frompension funds compared to those who retired in 2000; and have left us on a carbon path that will leave us vulnerable to climatic disruption.
That seems like light years away from their previous position.
The need has been urgent for some years now but the OECD were blind to it – instead leading the charge (or trying to in a race with the IMF) to impose the neo-liberal policy structures that have created, prolonged and deepened the crisis.
Now the need is urgent! Well, that is better than not shifting their position I suppose.
The UK Guardian commentary on the matter notes:
There is, of course, a word to describe action by the state to boost demand when private-sector activity is weak, and that word is Keynesianism. It was not a word that was used much in the three decades when neoliberalism reigned triumphant.
But times change and after five years in which its forecasts have proved persistently overoptimistic, the OECD is becoming increasingly fretful.
I don’t actually think the OECD is fretful. They are just looking ridiculous and the on-going forecast errors over the last several years have made the organisation look incompetent.
And Groupthink goes deep. It takes a lot for an entire organisation to change direction. The OECD was previously Keynesian (in origin). It shifted in the 1970s into a neo-liberal outfit as it absorbed graduates from right-wing economics programs that concentrated on advancing the Monetarist deceit.
Those graduates rose to senior positions and have a complete career of pushing the deceit into the public policy domain.
As Aristotle was alleged to say “One swallow does not a summer make …”
The UK Guardian concluded that:
Words, however, come cheap. Just as the IMF’s new thinking about the failings of neoliberalism is not always shared by the officials that give policy advice to countries in economic difficulties, so there is no obvious rush by OECD members to club together for a joint public investment programme.
But it is clear that these organisations (the IMF and the OECD) are becoming increasingly schizoid in their output. One the one hand, we see leaked transcripts where IMF officials are conspiring to create an ‘event’ in Greece to bring the Government to heal, whereas then some other researcher or two publish material that concludes that neo-liberalism has been a disaster.
Similarly for the OECD.
The point is that when internal continuity starts to break down within groups that have previously maintained cohesion, it is a sign that the Groupthink discipline is under threat.
How groups respond to that is the question.
One suspects that the empirical facts are so contrary to the ideological positions held by the OECD and the IMF that the continuity of their positions will break down. These organisations are somewhat different to the prejudicial think tanks that are set up by Wall Street financiers or robber baron capitalists (Koch brothers for example) to pump out narratives which server their own personal interests.
It is easier for those organisations to go on lying. For the OECD and the IMF it is harder to continue looking stupid.
Paperback version of my Eurozone book now available
>My current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – carries an on-line price of £99.00.
It is now available in much cheaper paperback form for £32.00.
Also the eBook is available 36.27 US dollars from Google Play or 61.45 Australian dollars from eBooks.com.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved..