It would be natural to think austerians were on the defensive at the spring meetings of the International Monetary Fund and World Bank.
A group from the University of Massachusetts Amherst convincingly demonstrates that an important academic paper showing high public debt was linked with low growth rested on crumbling foundations. And the IMF shook the ground further with warnings that some leading economies – the US, Germany and the UK – had fiscal policies that were too tight for their own good and the wider world.
But to conclude there is a causal link between these events and an imminent change in deficit reduction policies would be as mistaken as assuming high public debt automatically causes growth to weaken.
Exposing the computational weaknesses in the Reinhart and Rogoff paper will clearly have some effect. The most important is likely to be that politicians will no longer have a simple number – a debt level of 90 per cent of national income – to throw into the public argument.
But there is a gulf between the rhetoric of politics, where people search for the simple message to defend a policy, and the policy-making process. In the UK, for example, the previous Labour government justified an austerity package in 2009 only a little looser than that being implemented by the current government before the original Reinhart and Rogoff paper was written.
While austerian politicians might have to return to the old language about the merits of deficit reduction – warning about the perils of following Japan’s route, of the rising burden of debt servicing charges and the inability to respond to a new crisis with high levels of debt – the remarkable feature of the spring meetings in Washington so far is how little the academic spat over Reinhart and Rogoff has permeated the conversations.
Addressing an influential audience over lunch in the IMF buildings on Wednesday, Professor Robert Barro of Harvard University, a life-long critic of fiscal stimulus, launched a tirade against what he saw as the sloppy thinking of Keynesians.
Christine Lagarde, IMF managing director, insisted that she was not looking for fiscal stimulus anywhere. The fund does not want to slow austerity plans in the eurozone periphery – Greece, Cyprus, Spain, Italy, Portugal or Ireland. Instead it is seeking less severe deficit reduction measures largely in three countries – the US, UK and Germany – which it deems to have “fiscal space”.
The IMF’s favourite measure of the pace of deficit reduction is the change in the cyclically adjusted primary deficit as a share of national income – a very slippery measure as it depends on a regularly changing estimate of the amount of spare capacity in each country. For the US, this measure is tightening by 1.8 per cent of national income in 2013 – a rate of improvement the IMF thinks should be roughly halved to 1 per cent.
For the UK, which is tightening at a rate of 1 per cent already, the fund says the pace of austerity should be slower, but refuses to say by how much. British officials are annoyed by the IMF calling for the UK to cut the underlying deficit by less than the US and accuse the fund of inconsistency and a return to discredited 1960s-style fiscal fine-tuning. “It doesn’t make any sense,” one senior UK official said.
As far as Germany is concerned, it is loosening its budget already on the IMF’s measure and so is incensed that it is again in the spotlight to do more. Berlin argues that structural reforms are the only sustainable route to recovery.
The arguments will rage over the weekend and there will be no resolution. The IMF will find itself in a very difficult spot, making no country happy. For countries where austerity is doing real damage in the eurozone periphery, the IMF is resolute that they cannot ease up. These countries have little market access and the IMF wants them to get their finances into a position where they can repay their IMF loans.
Countries where the fund is calling for slower deficit reduction are not listening and are highly unlikely to change course.
In the end, neither academics nor the IMF have much power over national policies, unless countries owe them money.
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