Wednesday, January 25, 2012

Bill Mitchell has some words for Christine LaGrarde

Read it at billy blog
IMF – the height of hypocrisy but still wrong as usual
by Bill Mitchell
The whole emphasis on fiscal consolidation which is underpinned by the flawed IMF concept of “fiscal space” is based upon the adoption of rigid notions that a budget deficit outcome should be a policy target.
Given the endogeneity of the budget outcome (as evidenced by the counter-cyclical nature of the automatic stabilisers), targetting a particular budget outcome will typically lead to failure. The budget outcome will always reflect the state of the economy. When the economy is weak the budget deficit will rise and vice-versa.
The policy target should be to generate appropriate rates of employment and GDP growth, and let the budget balance be whatever is necessary to achieve that target.
There is no compromise in that position. One would advocate reducing budget deficits when aggregate spending was pushing up against the real capacity of the economy to respond in real terms (that is, by producing the goods and services).
That is, fiscal policy would become typically counter-cyclical. Advocating degrees of pro-cyclical fiscal policy will never produce adequate outcomes on a sustainable basis.

1 comment:

Anonymous said...

This is analogous to an engineering firm whose buildings suffer one structural failure after another yet continue to receive contracts.