Need for Rethinking at the IMF of Potential Output, Full Employment, and Macroeconomic Policy Generally
April 17, 2017
Contact: Dan Beeton, 202-239-1460
Washington, DC ― In response to the International Monetary Fund’s release today of its biannual World Economic Outlook, CEPR Co-Director Mark Weisbrot issued the following statement:
“In the midst of what the IMF correctly describes as ‘the broadest synchronized upsurge in global activity in close to a decade,’ the Fund’s analysis falls far short of what is needed to improve employment and living standards for the majority of people in countries of all income levels, and may even add to the downside risks to the global economy.
“The IMF sees the United States as being driven ‘above full employment’ in the near future, because ‘recent fiscal policy changes are expected to push output above potential…’ While many have objected to the upward redistribution of income and other aspects of the 2017 tax legislation, the risk that it will push the economy above full employment is still quite low. As Dean Baker has noted, the employment rate for prime-age workers (ages 25–54) is still below its level of before the Great Recession and well below its level of 2000.
“There is still plenty of room to expand employment in the United States, especially when inflation remains so low. The Fed’s preferred measure of inflation, core personal consumption expenditure inflation, remains below the Fed’s target of 2 percent; it has been 1.6 percent over the past year, and is projected at 1.7 percent in 2018.
“A much greater risk than excessive inflation at present is that the Fed will raise interest rates too fast and push the economy into recession. With the exception of the last two recessions, which were triggered by the bursting of asset bubbles, that is how US has been tipped into recessions since World War II. Since US recessions and even interest rate increases can have a very large impact on the rest of the world economy, including developing countries, this is a much bigger risk to the global economy that the IMF should be concerned about than inflation drifting above the Fed’s 2 percent target.
“The IMF goes further, seeing advanced economies as a group as reaching potential output (i.e., a full employment level of output) by the end of this year. This is not plausible. Even when looking at individual countries, such as Spain, the IMF’s analysis does not make sense. For example, the IMF has projected Spain to have gone beyond its potential output this year, yet unemployment in Spain is more than 16 percent. The idea that this is a full employment level of GDP for Spain clearly needs to be re-examined.
“These analyses have consequences. In Spain, for example, the IMF calls for ‘an improvement in the structural primary balance,’ — i.e., fiscal tightening. In general, the IMF sees the improved forecast for the global economy as an opportunity for ‘fiscal consolidation’ in many countries ― despite the fact that high-income countries can borrow at negative real interest rates, and therefore it makes economic sense to do so if they can use the money to make public investments that have a positive rate of return.
“The IMF also sees a need for fiscal consolidation in many developing countries, including India and Brazil.
“The IMF has influence over policy even in countries where it does not have loan agreements, for example with its regular Article IV consultations with member governments. Its recurring tendency to recommend fiscal and monetary tightening when they are not needed is a problem for much of the world economy.”