Mitchell, B. (2014) “The myopia of neo-liberalism and the IMF is now evident to all“, Mainly Macro Blog, 08 October.
The IMF published its October – World Economic Outlook – yesterday (October 7, 2014) and the news isn’t good. And remember this is the IMF, which is prone to overestimating growth, especially in times of fiscal austerity. What we are now seeing in these publications is recognition that economies around the world have entered the next phase of the crisis, which undermines the capacity to grow as much as the actual current growth rate. The concept of ‘secular stagnation’ is now more frequently referred to in the context of the crisis. However, the neo-liberal bias towards the primacy of monetary policy over fiscal policy as the means to overcome massive spending shortages remains. Further, it is clear that nations are now reaping the longer-term damages of failing to restore high employment levels as the GFC ensued. The unwillingness to immediately redress the private spending collapse not only has caused massive income and job losses but is now working to ensure that the growth rates possible in the past are going to be more difficult to achieve in the future unless there is a major rethink of the way fiscal policy is used. The myopia of neo-liberalism is now being exposed for all its destructive qualities.
The IMF say that:
In addition to the implications of weaker potential growth, the major advanced economies, especially the euro
area and Japan, could face an extended period of low growth reflecting persistently weak private demand that could turn into stagnation. In such a situation, some affected economies would not be able to generate the demand needed to restore full employment through regular self-correcting forces. The equilibrium real interest rate on safe assets consistent with full employment might be too low to be achieved with the zero lower bound on nominal interest rates.
Be warned – this is more neo-liberal nonsense in the sense that it leaves out obvious solutions to any secular stagnation.
Here is the context. An economic cycle turns south when total spending falls below that expected by the producers of goods and services and they realise their production levels are too high relative to demand.
Inventory levels rise, sales orders fall and the spending weakness starts to multiply throughout the economy as laid-off workers adopt conservative positions with respect to the spending plans.
As the output gap (the difference between the what the economy can produce given its stock of capital equipment etc and the fully employed labour force and actual output) increases, unemployment rises and capacity utilisation rates fall.
Relevant posts:
- IMF (2014) “World Economic Outlook, October 2014: Legacies-Clouds-Uncertainties“, World Economic and Financial Surveys, International Monetary Fund.
- Joyce, P. J. (2014) “The IMF and Sovereign Debt“, Economonitor–A Roubini Global Economics Project, 09 September.
- Mitchell, B. (2014) “IMF attacks the Stability and Growth Pact“, Bill Mitchell Blog, 26 June.