Posts Tagged ‘IMF’

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While the policy side of the IMF continues (with the other members of the troika) to push for austerity measures in Greece, its research side (against the grain of much of contemporary mainstream economics) is sounding the death knell of trickle-down economics.

I am referring to the recent report, Causes and Consequences of Income Inequality: A Global Perspective, prepared by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, and Evridiki Tsounta [pdf]. Their main finding (based on an analysis of data for 159 advanced and emerging markets and developing economies) is that there’s an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth.

Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.

To my mind, cross-country studies of this sort should always be taken with at least a few grains of salt (precisely because the causes and consequences of inequality vary across countries, and correlation is not causation). And the specific coefficients (such as the idea that “if the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years”) even more so (because, as I’ve argued before, the underlying data, such as Gini coefficients, mean very different things depending on the countries studied).

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Still, this IMF study does give lie to the idea that the grotesque levels of inequality we’ve been witnessing in recent decades—the dramatic rise in both top-1-percent incomes shares and corporate profits—are a necessary condition for economic growth.

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Most important, the IMF study challenges the idea that everyone eventually shares in whatever economic growth has taken place (which is dramatically illustrated by the growing gap between productivity and wages).

In my view, these should be considered the last nails in the coffin of trickle-down economics.

Investment

Both sides of mainstream economics will likely claim support in the International Monetary Fund’s latest report, the April 2015 World Economic Outlook—especially chapter 4, on business investment.*

The Keynesians will certainly like the relationship between investment and output—in other words, the idea that private business investment has declined since the start of the economic crisis because aggregate demand has fallen. Even more: they’ll find support in claim that fiscal policy aimed at reducing budget deficits has actually undermined private investment (which is the flip side of the Keynesian crowding-in argument, i.e., the notion that deficit spending doesn’t crowd out private investment, as neoclassical economists claim, but actually spurs or crowds in corporate investment).

The neoclassicals, for their part, will be encouraged by the focus on “business confidence,” that is, the argument that uncertainty (e.g., with respect to government policies) has played a role in discouraging business investment.

In other words, for Keynesians, the problem with insufficient business investment is mostly on the demand side; while for neoclassical economists, it’s mostly on the supply side.

And, true to form, the authors of that section of the report suggest policy changes on both the demand and supply sides:

We conclude that a comprehensive policy effort to expand output is needed to sustainably raise private investment. Fiscal and monetary policies can encourage firms to invest, although such policies are unlikely to fully return restore investment fully to precrisis trends. More public infrastructure investment could also spur demand in the short term, raise supply in the medium term, and thus ‘crowd in’ private investment where conditions are right. And structural reforms, – such as those to strengthen labor force participation, – could improve the outlook for potential output and thus encourage private investment. Finally, to the extent that financial constraints hold back private investment, there is also a role for policies aimed at relieving crisis-related financial constraints, including through tackling debt overhang and cleaning up bank balance sheets.

What no one seems to want to admit—the authors of the report as well as mainstream (both Keynesian and neoclassical) economists—is that private corporations, which got us into this mess in the first place, have failed to get us out of it. They’re the only ones that have benefited from the recovery, as corporate profits have reached record levels, but they haven’t responded by increasing investment. Instead, they’ve been using the profits they’re accumulated to buyback their stock, engage in new mergers and acquisitions, and distribute them to high-level executives and shareholders.

They want us to believe they’re superman. But we know they’ve simply failed—on both the demand and supply sides.

*To be clear, the chart does not indicate actual declines in business investment and output. Rather, it represents percent deviations from forecasts in the year of recessions.

Protesters from the Communist-affiliated trade union PAME shout slogans as they march towards the parliament during a general labour strike in Athens

Greek labor unions staged a nationwide strike today to protest against austerity policies imposed on the country by the current government and its foreign creditors, including Germany.

Schools and pharmacies were shut, ships remained docked at ports, hospitals operated on emergency staff, and transport in Athens was disrupted due to the 24-hour strike called by private sector union GSEE and its public sector counterpart ADEDY.

More than 20,000 workers, pensioners, students and the unemployed marched peacefully through the streets of the Greek capital chanting “EU, IMF take the bailout and get out of here!”

Unions said their anti-austerity message was also aimed at German Chancellor Angela Merkel, who is due to meet Greek Prime Minister Antonis Samaras in Athens on Friday. Germany has insisted on painful spending cuts and tax hikes in return for international loans.

“It’s time to save people not banks,” said 59-year old economist Eleni Prokou. “Merkel and the troika should stop sticking their nose in our business.”

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129108_600 Martin Rowson 22.03.13

Protest of the day

Posted: 3 February 2013 in Uncategorized
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0a635a69-6796-4273-997f-775ebccc5c0b-460 Greece Farmers'  Protest

Greek seamen and farmers continued their protests against austerity measures imposed to satisfy international lenders.

The Greek government is holding talks with the protesters but refuses to budge on any demands that might undermine its deficit cutting efforts, a condition of bailout funds and debt relief from the European Union and International Monetary Fund.

Greece last month invoked rarely used emergency powers to break a strike of subway workers, serving military-style orders instructing them to return to work or face arrest.

Greece’s biggest labor union has called a general 24-hour strike for 20 February.

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