Friday, October 9, 2020

Keep the receipts, but spend

In an interview with the FT's Brendan Greeley, IMF Managing Director Kristalina Georgieva explains that "The fund needs to have a big bazooka" of $1 trillion to support lending to developing countries. The change in economic orthodoxy on this point in the past two years has been significant.

"Traditionally, and particularly within the IMF, economists have argued in favour of the scarcity of austerity -- a conscious decision to cut deficits. First, the argument went, wages and prices would adjust down. Then, without any more looming debt crises, citizens and investors would have more confidence in that country and place their bets, buying things and paying for more buildings and machines to make the economy productive again."

Despite its consistency with classical economic theory, the argument has become viewed as flawed because most people don't think about what government deficits might be in future decades when deciding whether to run out to IKEA and buy a couch. Today, Georgieva agrees that

"the adjustments people have to make during periods of austerity don't fix the problem; they are the problem. Austerity and autocracy offer comparable challenges. In both cases, it's not that people buy less. It's that for reasons outside their control, they can't be productive."

In short, the IMF has shifted from promoting spending cuts to "Spend. Keep the receipts. But spend."

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