Stop blaming the IMF for everything


Ian Waldie/Bloomberg

International Monetary Fund (IMF) managing director Christine Lagarde has withdrawn as Smith College's commencement speaker after student protests.This outcry wasn't over Lagarde herself, but rather the institution she leads. An online petition said that the IMF "contributes to many of the systems we are taught to fight against," so they didn't want Lagarde to speak to them lest they give their tacit support to it.

This protest isn't just — trigger warning — political correctness taken to the extreme. It's also out-of-date. The IMF has actually become the "good guys" since the financial crisis hit.

The IMF used to have a pretty well-deserved reputation for destroying economies. Okay, that isn't really fair. Economies were already destroyed by the time they called the IMF for help. But the global lender would set tough conditions on its aid that increased short-term pain that was hardly in short supply to begin with. It would force countries to cut their public sectors and social spending, while liberalizing capital flows and privatizing state-owned companies that were often cozily controlled by political insiders. If, that is, countries wanted to get the next tranche of their loans to avoid default.

Now, these countries really did need (most of) these kinds of structural reforms. But they needed those kinds of reform in the long run. Making them follow this austerity-and-deregulation playbook in the short run, especially when these problems had little, if anything, to do with their crises, was a disaster. Not only that, but instead of cushioning these crashes with countercyclical policy, the IMF did the reverse: it made countries raise interest rates at the same time it made them cut spending. That turned recessions into depressions in Indonesia, Thailand, and Argentina in the late 1990s.

But the IMF has become, if not cuddly, at least clear-eyed, in the wake of the Great Recession. Other organizations like the Bank for International Settlements (BIS) and the Organization for Economic Cooperation and Development (OECD) have been busy inventing reasons to ignore textbook economics and tighten policy despite high unemployment and low inflation. The BIS went so far as to warn in 2011 that "growth must slow" — yes, really — if were going to keep the inflation monster from coming out under the bed.

The IMF, though, has kept its head firmly out of the sand. Now, it did, against its better judgment, go along with the draconian Greek bailout. But, unlike the 1990s, it was the one arguing for a more lenient approach, only to be overruled by the European Commission. It's also shown that austerity hurts more than policymakers typically assume it does in a zero-interest rate world; that, in econospeak, the fiscal multiplier is unusually high now. Not only that, but it's found that within reasonable limits, redistribution actually tends to help growth by decreasing inequality.

And, finally, the IMF warned about the dangers of "lowflation," which can push economies into long slumps by making it harder for wages to adjust and debtors to deleverage. Indeed, Lagarde has called on the ECB to do more, and do it now, to get itself out of its self-imposed trap.

Anti-austerity, pro-redistribution, and pro-inflation. This isn't your father's IMF, even if your father grew up in the 1990s. It's an IMF that realizes depression economics works differently from regular economics.

That's a story Smith College students probably would have wanted to hear — if they had been willing to listen.

Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.
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