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Tuesday, April 17, 2012

"Who Wants to Tax and Spend? The IMF"

Jonathan Portes says the IMF is improving its advice about fiscal policy, but the OECD and the European Commission still have a lot to learn:

Who wants to tax and spend? The IMF, that’s who, by Jonathan Portes: I noted at the turn of the year that the IMF, since Christine Lagarde took over, had made it more and more obvious that it thought a number of countries including the US, Germany and (by implication) the UK, were tightening fiscal policy too fast. ...
Today the Fund has released the full WEO [World Economic Outlook]. It makes it still more obvious that the Fund thinks that, in the short-term, the problem is above all a lack of demand, and that excessive austerity is, as Paul Krugman and Brad DeLong have argued, self-defeating...
In other words, the Fund wants us, for standard Keynesian reasons, to spend more on infrastructure (and housing) and increase welfare benefits for poor people (who will spend them), and pay with it by taxing the rich (those with a lower “marginal propensity to consume”. This would raise demand in the short term, without worsening the fiscal position. For those who see the Fund as being both anti-Keynesian on macroeconomic policy, and classically “liberal” on microeconomic policy, this will come as something as a shock. ...
In this the Fund’s approach stands in sharp contrast to the economic illiteracy and political supineness of both the OECD and the European Commission. Although the OECD continues to lead the world in the quality of its comparative microeconomic analysis (especially on labor market policy and immigration), its macroeconomic policy judgment has proved absolutely abysmal – remember that as recently as last May they were advising us all to raise interest rates.  As for the European Commission, my thoughts on the people who brought us Spain and Greece – and youth unemployment over 50% –  are here and here.

I think it's also important to recognize that much of the push for austerity is ideological. The real goal is smaller government by whatever means and the (failed) confidence fairy economic argument -- the idea that cutting the deficit would increase our confidence in the future and cause enough spending to more than compensate for the austerity measures -- is used to justify cutting government spending. This is why those who push for austerity only want to talk about cutting government spending. Increasing taxes, another way to close the budget gap and call the mythical confidence fairy, is completely off the table.

    Posted by on Tuesday, April 17, 2012 at 09:40 AM in Economics, Fiscal Times | Permalink  Comments (27)


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