The International Monetary Fund has a reputation, hard earned over the decades, of being the annoying friend who is always telling you to be more responsible. Eat more vegetables! Put in more hours at the office! Do you really need that second glass of wine?
Similarly, it has historically been the IMF’s role to tell countries to behave themselves economically: Cut those deficits! Let’s see some tighter monetary policy! Do you really need such a generous public welfare system?
But something strange has changed in the world economy, which is evident in the Fund’s latest edition of the World Economic Outlook. The IMF is now among the strongest voices against excessive fiscal austerity and tight money.
The Fund is most direct in its prescriptions for Britain, which has had a stagnant economy for the past three years as deficit-reduction has gone into effect. Sure, the language is that of international bureaucratese (“In the United Kingdom, where recovery is weak owing to lackluster demand, consideration should be given to greater near-term flexibility in the fiscal adjustment.”). But there is no mistaking the message: Hey, David Cameron! Slow down with the deficit reduction!
Similarly, the Fund worries that the United States is reducing deficits too fast under the sequester spending cuts. “In the United States, the concern is that the budget sequester will lead to excessive consolidation,” says the WEO.
On the monetary policy front, the Fund is more blunt: “Monetary policy needs to stay easy.” The efforts by the Federal Reserve, the Bank of Japan, and other central banks to buy assets and flood the financial system with money are appropriate, the document argues, and the European Central Bank needs to ease further to combat the recession in the 17-nation Eurozone. “Europe should do everything it can to strengthen private demand," said Olivier Blanchard, the IMF’s chief economist, in a press conference Tuesday. "What this means is aggressive monetary policy and getting the banking system to be stronger.”
So what is going on here? There has been a current of thought at the Fund questioning old assumptions about what impact fiscal austerity has on an already-depressed economy, conclusions that have made the economists there wary of slashing deficits too fast.
But the real trend evident in the Fund’s prescriptions for the world economy is bigger than that. Part of the reason we have independent institutions like the IMF is that political leaders have a tendency toward short-termism, a desire to enact policies that might feel good in the short term (high deficits and easy money) but cause pain in the long run (fiscal crises and inflation). The IMF, and politically independent central banks, help counteract those tendencies.
But in much of the world, the crisis threw that basic alignment out of whack. It is the political leaders in Western Europe and the United States who are slashing deficits faster than the economists at the IMF think is wise. When Ben Bernanke goes before Congress, he is more frequently assailed by politicians who argue that the Fed is doing too much to boost growth rather than too little.
It’s kind of a mixed-up world, and it is a sign of a few things. First, when democracies experience an economic shock as deep as the one of 2008 and 2009, it can throw off the usual patterns of politics. As Prakash Loungani points out, the biggest difference between the recovery from that recession and typical ones of decades’ past is that fiscal policy has been more of a drag.
It is to the credit of the economists at the Fund that their recommendations to policymakers have adapted to this strange world we’re living in rather than sticking with their more normal, doctrinaire advocacy of monetary and fiscal restraint.
In other words, they may be the friend who has in the past advocated healthier food, more work hours and less wine. But they’re also a good enough friend to see that there are times—say when a person is stressed out and due for a vacation, when the opposite is the right prescription.