Is the IMF Keynesian again?

In its October Fiscal Monitor, the IMF makes the case for more government spending. It explains how increased public investment can boost growth, increase resilience, and provide for the development of a more inclusive economy.

After a decades-long adherence to austerity policies that are widely viewed to have imposed more pain than gain, it might be a sign that the IMF is becoming Keynesian again (Keynes and Harry Dexter White were the intellectual founding fathers of the International Monetary Fund, drafting the blueprints for it in 1944).

Introducing the Fiscal Monitor chapter on Public Investment, the IMF writes

"This chapter argues that governments need to scale up public investment to ensure successful reopening, boost growth, and prepare economies for the future. Low interest rates make borrowing to invest desirable... Increasing public investment by 1 percent of GDP in advanced and emerging economies could create 7 million jobs directly, and more than 20 million jobs indirectly. Investments in healthcare, housing, digitalization, and the environment would lay the foundations for a more resilient and inclusive economy."

In the report, they explain

"With ample underused resources, public investment can also have a more powerful impact than in normal times. Public investment and its crowding-in effects on private investment could mitigate secular stagnation and the savings glut, which predate the onset of COVID-19 ... but have been exacerbated by the crisis, since uncertainty about the course of the pandemic has further dampened private investment and spurred higher levels of precautionary saving. Moreover, the recovery of private sector activity is being constrained by weakened private sector balance sheets, losses in human capital because of unemployment, and skill mismatches as demand shifts from high-contact sectors to those that permit social distancing. Public investment can encourage investment from businesses that might otherwise postpone their hiring and investment plans."

Chris Giles at the Financial Times summarizes the report, writing that

"The IMF has issued a rallying call to rich countries around the world to increase public investment and spark a strong economic recovery from the coronavirus pandemic. Advanced economies should worry less about their public debt, but instead take advantage of historically low borrowing costs to increase spending on infrastructure maintenance immediately."

He added "The report marked a shift away from the IMF's normal concerns about public finances in rich countries."

The IMF's deputy director of fiscal affairs Paolo Mauro explained that the high level of uncertainty in the global economy strengthened the case for increasing public investment. "You get a bigger bang for your buck from public investment because investment by private firms is extremely low."