The IMF and Austerity

Today’s IMF economic update further downgrades growth projections, including here in Canada where growth in 2012 is forecast to be just 1.7%, down from the IMF’s September forecast of 1.9%.  That is well below the just released Bank of Canada forecast of 2.0%, and clearly implies rising unemployment.

On fiscal policy they say:

Countries should let automatic stabilizers operate freely for as long as they can readily finance higher deficits. Among those countries, those with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation. Overdoing fiscal adjustment in the short term to counter cyclical revenue losses will further undercut activity, diminish popular support for adjustment, and undermine market confidence.

Canada has record low interest rates and the lowest net debt to GDP ratio of the large advanced industrial countries. Maybe we should reconsider austerity.


One comment

  • Using the US for example since we are not an island.

    Wages have not outpaced that measly CPI growth in the US or Canada ; Wages have fallen in real terms, while unemployment for those counted, and non part timers lookifing for full time work is 8.4. In this enviroment inflation has grown 3% for 2011. However once you factor in the the money that was took out of circulation by everyone partimers who once had full time jobs, those who went back to school, or are simply discouraged, to those who accepted less pay in military service or another arm of goverment. Most modern economists would tell you that would cause deflation.

    There plan in a nutshell is the following

    “In the 1920s an American economist Ivring Fisher noted this kind of Phillips curve relationship. However, Phillips’ original curve described the behavior of money wages.”

    “In the years following Phillips’ 1958 paper, many economists in the advanced industrial countries believed that his results showed that there was a permanently stable relationship between inflation and unemployment. One implication of this for government policy was that governments could control unemployment and inflation with a Keynesian policy. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment – there would be a trade-off between inflation and unemployment. For example, monetary policy and/or Fiscal policy (i.; deficit spending) could be used to stimulate the economy, raising gross domestic product and lowering the unemployment rate. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates.”

    “Most economists no longer use the Phillips curve in its original form because it was shown to be too simplistic.”

    “But still today, modified forms of the Phillips Curve that take inflationary expectations into account remain influential. The theory goes under several names, with some variation in its details.

    An equation like the expectations-augmented Phillips curve also appears in many recent New Keynesian dynamic stochastic general equilibrium models. In these macroeconomic models with sticky prices, there is a positive relation between the rate of inflation and the level of demand, and therefore a negative relation between the rate of inflation and the rate of unemployment. This relationship is often called the “New Keynesian Phillips curve.” Like the expectations-augmented Phillips curve, the New Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily, but cannot lower it permanently. Two influential papers that incorporate a New Keynesian Phillips curve are Clarida, Galí, and Gertler (1999) and Blanchard and Galí (2007).”

    “Since 1974 seven Nobel Prizes have been given for work critical of the Phillips curve. Some of this criticism is based on the United States’ experience during the 1970s, which had periods of high unemployment and high inflation at the same time. The authors receiving those prizes include Thomas Sargent, Christopher Sims, Edmund Phelps, Edward Prescott, Robert A. Mundell, Robert E. Lucas, Milton Friedman, and F.A. Hayek.”

    Hing unemployment will not stop inflation. Inflation can cause unemployment, inflation eliminates lowest paying jobs if wages do not rise to meet the increase in goods and services, you go without something elsewhere, which effects someones job. Which in my opinion is not justifiable even if you think you can afford the price increases, that less money to be spent on goods and services.

    This is not healthy for employment, and in the worst periods of inflation are subject to perlious rates of unemployment in ranges from 80 – 90% see Wimar Republic; or recently Zimbabwe, while the great depression in the US of A saw rates only rose to 25%-35% under Deflation.

    The money we need to spend will like our grandparents come from savings we have built up, since it will be our own money at stake the descision we make with will have more of an impact, anyone who has saved for something knows its not like spending money you get from say a parent especially as kid with his first job.

    “John Maynard Keynes described the situation in The Economic Consequences of the Peace: “The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.” ”

    Ron Paul an Us Congressman who is of the Austrain school of thought who advocates Paul Vockler who was a staunch advocate of glass stegall. I am closer to Paul Vockler then I ever will be to Ron Paul. The resources that the US goverment would require in Ron Paul veiws is so nill since he would phase out things like social security by allowing those to opt out turning in into a essentially a vulenteer program through backdoor means, he is going for the win progressives, in more ways then one.

    Message to all Progressives, advocating balacing the books through raising taxes is your best solution, I dont agree and I will advocate balancing the book through cutting spending to match a low tax rate. In the end, we will meet somewhere in the middle by advocating balancing the books. However if you attempt to defeat those by using deficits and running roughshod, and allying yourselves with those who would increase the deficit, but not raise a single tax, ie look at Harper the premire John Maynard keynes would in my opinion roll in his grave.

    During World War II, Keynes argued in How to Pay for the War, published in 1940, that the war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers lending money to the government), rather than deficit spending, in order to avoid inflation. Compulsory saving would act to dampen domestic demand, assist in channelling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post war slump by boosting demand once workers were allowed to withdraw their savings.

    So Keynes advocated diffrent solutions, especially for debtor nations. Today yes, he would call for China the worlds biggest creditor to act like the US did in the great depression, but he would not advocate that his positions to be followed today by the US, at current debt levels, or many western countries since his policies could only be followed today through deficit finiacing something he wrote himself can lead to extroadinary bouts of inflation. I dont even agree with him on a host of issues but he understood his school of economics better then most that cite him today.

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