|Why did nobody see this coming, the Queen asked of the financial crisis some years ago. Today, her question would be only slightly different: if all you economists are so clever, why, more than five years into the crisis and with no end in sight, are you still debating solutions?
I’m at the spring meeting of the International Monetary Fund in Washington this week, and it is striking just how little the debate has moved on since the crisis began. One of Baroness Thatcher’s attributes was the ability to communicate complex economic problems and ideas in simple, common-sense terms that connected with ordinary people.
This is not a virtue with which the IMF, with its several thousand economists, is blessed. Of course, there has to be some forum for worthy international debate on matters economic, and this is in part what the IMF is for. It is also true to say that the size and complexity of today’s economic quagmire has confounded all standard analysis.
Even so, you’d expect more from an organisation that is meant to set the international agenda on financial stability and economic growth. There is a glaring disconnect between the grinding reality of economic stagnation and the vacuous deliberations of the IMF policy elite.
Discussion of the size of “fiscal multipliers”, which countries should be consolidating and which stimulating, the trajectory of bank deleveraging and so on – all of it seems to be conducted in a parallel universe of comfortable irrelevance.
The IMF was created for just the sort of crisis that now confronts us, but the bottom line is that in its moment of calling, it has flunked the test. At every stage, it has misdiagnosed and underestimated the problem. First, it prescribed ultra-easy monetary policy, only to learn that this doesn’t help demand in a serious balance-sheet recession.
Then there was the classic Keynesian response of fiscal stimulus, which succeeded only in collapsing the public finances in advanced economies for a quite limited impact on growth. With deficits and public indebtedness spiralling out of control, the IMF reversed tack and urged fiscal consolidation. Surprise – growth continued to stall. So now it seems to be advocating fiscal expansionism again.
Bizarrely, the IMF’s chief economist, Olivier Blanchard, has singled out the UK for special criticism over the policy his organisation once advocated – fiscal austerity, if indeed what Britain is practising can be called austerity. George Osborne is “playing with fire” by consolidating too fast, he said, apparently oblivious to now evident contradictions in the IMF’s position.
Why is the UK being asked to go back to fiscal expansionism when there are no such demands made of Germany? Why, too, is Britain being told to let rip when much harsher fiscal consolidation is being urged on countries in the eurozone with smaller fiscal deficits. It makes no sense, unless explained as traditional French Anglophobia, incredible though this might seem of an otherwise highly respected international economist such as Professor Blanchard.
To be fair, the IMF is a large organisation with lots of different views within it. The economics team, led by Prof Blanchard, has always been more Keynesian in its outlook than the fund’s more conservatively minded fiscal monitoring wing.
Christine Lagarde, who only a year ago said she “shuddered” to think what would have happened to the UK had it not followed the Coalition’s consolidation plan, holds a more politically diplomatic and nuanced view. She’s not openly going to slate a country not obviously in need of a bailout, particularly when it happens to be the one that did the most to help her secure her position as managing director, but even she seemed to suggest that slow growth meant the UK might have to change tack.
Be that as it may, confusion about the IMF’s position adds to the sense of an organisation which has lost its compass, and is all out of ideas and solutions. Sometimes the fund looks like no more than a preparatory school for grandstanding French presidential hopefuls, first in the form of the “rutting chimpanzee”, Dominique Strauss-Kahn, and now the fragrant Ms Lagarde.
Professor Blanchard’s criticism of the UK, aligning the fund closely with the Labour opposition, is ill-judged and oddly misinformed. The reality of British consolidation is about 1 per cent of GDP a year, which is broadly in line with what other fiscally stretched advanced economies are doing and is described by the IMF’s fiscal monitor as “about right”.
If you spend 50 and your income is 40, is it really austerity to reduce spending to 47 over three years, which is roughly what the UK’s distinctly unambitious consolidation amounts to? Can it really be sensible to say, as Professor Blanchard seems to suggest: you know what, I’m going to return to 50?
Any degree of fiscal consolidation is always going to be hard, as Anders Borg, Sweden’s finance minister, said at one of the sessions here – which is why you never want to get yourself into the position where you have to do it.
Unfortunately for Britain – judged by the IMF’s own analysis to be in the bottom class along with the weaker eurozone nations in terms of its fiscal vulnerability – it is in that position. Getting out of it has to be very much part of the long march back to a more competitive and well-balanced economy. That the IMF is going all wobbly on this view is further evidence of institutional impotence in the face of disaster.