Friday, April 16

The old economic orthodoxies are finally unraveling. This really matters | Economic policy

TO estate tax to help pay the cost of fighting the pandemic. An international agreement to avoid a race to the bottom in corporate tax. An insistence that recovery from the second serious crisis in little more than a decade must be ecological and inclusive. The conviction that governments must spend whatever it takes to defend themselves against the threat of mass unemployment, regardless of the size of the budget deficit.

There is nothing surprisingly new about any of these ideas, which have been around for years, if not decades. What is different is that these are no longer just proposals put forward by marginalized progressive or Keynesian thinktanks in academia, but are part of an agenda. being persecuted by the International Monetary Fund and the United States Treasury under the presidency of Joe Biden.

This matters. Beginning in the 1980s, the IMF and the US Treasury forged what became known as the Washington Consensus – a set of beliefs that were imposed on any country facing economic difficulties and seeking help. The one-size-fits-all approach involved cutting public spending and taxes, and privatization, to create incentives for risk-taking entrepreneurs and to make inflation the primary objective of economic policy. These policies inevitably caused pain, but the “tough love” approach was thought to be worth it.

It has been a very different story in the preparations for the IMF spring meeting this week. Biden’s acceleration of a $ 1.9 trillion stimulus package through Congress, including direct payments to struggling American families, was significant in two ways. First, approximately 10% of the annual output of the US economy was far greater than the emergency support provided by Barack Obama after the 2008 global financial crisis. Second, and perhaps most importantly, it contained no promises of future deficit reduction. Austerity is not part of the Biden administration’s thinking, and neither is the idea that loan-driven demand inevitably leads to higher inflation.

The next phase of Biden’s plan is to spend another $ 2 trillion rebuilding America’s crumbling infrastructure. This will be financed by reversing part of Donald Trump’s cut in corporate tax rates, which Republicans in Congress will oppose but not the IMF. When asked about the projected increase this week, the fund’s economic adviser, Gita Gopinath, said Trump’s corporate tax cut hadn’t done much to boost investment. Furthermore, Gopinath was positively enthusiastic on the idea of ​​a global minimum corporate tax rate, something the United States has traditionally been wary of but now supports.

Over the past year, the IMF has tried increase financial firepower of its member countries through foreign exchange reserves known as special drawing rights. Trump’s concern that Iran would secure these rights meant there could be no progress while he was in the White House. Under Biden’s Treasury Secretary Janet Yellen, the deadlock was broken and a special drawing rights allocation of $ 650 billion was allocated. has now been announced.

If the old Washington consensus believed in small states, low taxes, and balanced budgets, the new Washington consensus believes in activist governments, inclusive growth, and a new green deal. Until relatively recently, the only outpost of the multilateral system supporting such ideas was the trade and development arm of the UN in Geneva.

That is no longer the case. This week’s regular IMF update on the state of the world economy emphasizes how the pandemic has worsened pre-existing inequalities. That’s true within countries, where the virus and its economic consequences have been hardest on the poor, the young, women, and ethnic minorities. It is also true Between countries, and the central banks and finance ministries of advanced nations have much more leeway to mitigate the impact of lockdowns than those in the poorest parts of the world.

Both the IMF and its sister organization, the World Bank, are clear that there can be no final victory in the battle against Covid-19 until everyone is vaccinated. The problem is not simply that developing countries lack sufficient doses; is that their health systems are underpowered and lack the trained personnel to provide treatment. Similarly, if the world is to transition to a zero-carbon future, it is necessary to include developing countries. That means additional financial resources. All this at a time when fears of a new debt crisis in developing countries abound.

Make no mistake, the IMF is still not a soft touch. The conditions imposed as the price of financial support are often draconian, and critics point to the disconnect between the rhetoric of IMF Managing Director Kristalina Georgieva and the policies imposed by her organization’s missions to countries in difficulty.

Meanwhile, rejection of what Biden has been doing has come from both the left and the right. Some of the president’s critics accuse him of not being radical enough; others are convinced that all the money creation by the US Federal Reserve and deficit spending by the US Treasury will inevitably mean much higher inflation. Conjuring the ghost of economist Milton Friedman, they say it will all eventually end in tears.

For now, however, it is the Friedmanites who appear marginalized, with the pandemic accelerating a shift in economic thinking that has been brewing for the past decade. Biden’s approach to running the economy – spending freely and taking a hard line with China – has more in common with that of his immediate predecessor than it did with Obama.

The change in attitude is due in part to a lack of results. Austerity did not lead to increased private investment and faster growth than was promised. Instead, the 2010s were a lost decade of stagnant living standards, which explains why the bidenomics is a huge hit with American voters.

Crises also encourage experimentation. Licensing schemes to subsidize the wages of those who cannot work are not the same as a basic income, but they are similar enough that people get used to the idea. Necessity rather than ideology explains why Rishi Sunak spent more than £ 400bn last year on emergency support programs in the UK, but a Labor chancellor would have done the same.

In a sense, history repeats itself. It took more than a decade after the end of World War I for him to realize that the gold standard was finished. It was the second, and not the first, oil shock that opened the door to the New Right economy in the 1980s. Those who thought that the financial crisis would result in a challenge to the Washington consensus were not wrong. In fact, the old noses are being questioned. It took 10 years longer than they expected, that’s all.

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