A total lack of leadership

[girl gone mad]

http://bilbo.economicoutlook.net/blog/?p=10472">A total lack of leadership
William Mitchell

Another G20 talkfest has ended in Toronto and the final communique suggests that the IMF is now back in charge. If you read the IMF Briefing and the World Bank Briefing to the G20 Summit you will get a sense of deja vu. The line now being pushed is, as always, structural reform of product and labour markets – which you read as deregulation and erosion of worker entitlements.

The IMF is selling the line that:

Credible consolidation plans—designed to be “growth friendly”—would mitigate the dampening effect on domestic demand. Monetary policy accommodation could be maintained for a more extended period to help support activity, since inflation would remain contained as fiscal balances are strengthened.

Their hope is that export surplus nations will rebalance their growth strategies via exchange rate adjustments to stimulate export sectors of the stagnant nations with low interest rates encouraging investment. They also claim that changing tax mixes (from payroll to consumption) will help growth while increasing revenue.

First, monetary policy is an ineffective expansionary tool. Rates are low and have been for some time. Japan failed to grow fast with zero interest rates for years. It was only when fiscal policy reached an adequate level that it started to show signs of life again.

Second, relying on exchange rate adjustments to lead to a major revitalisation of world growth via trade is to seriously underestimate the extent of the demand crisis facing the global economy. The IMF has been pushing export-led growth on to poor nations for decades with little overall shift in the poverty rates at the lowest levels.

All the IMF simulations are based on their GIMF model which is highly flawed. Basically, these models can give whatever result satisfies your ideological disposition. All that needs to be done is ensure the elasticities (the numerical relationships) on key variables – linking policy changes to output and monetary aggregates – are calibrated accordingly. So the GIMF model will always give large real gains when you deregulate the labour market even though there is no credible research literature that would support that conclusion.

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