The IMF is to publish its views on the US economy today. It has telegraphed these already as being: delay interest rate increases until the economy is showing more signs of recovery and seek to repair fiscal policy in the medium term – largely by tax increases to supply better education, infrastructure and childcare facilities.
Infrastructure spending is arguably a productivity-promoting expenditure but so much of this amorphous term seems to apply nowadays to consumption-like spending on parks, environmental measures, and of course the ubiquitous school halls and municipal buildings. As such it would add to the, at best, productivity-neutral spending that the IMF advocates.
The IMF, alongside so many other global forecasting institutions is transfixed on mechanistic identities which add up projections of spending to projections of saving and compare the outcome to previous years. It is oblivious to the fact that the biggest share, consumption, relies on investment (hence saving) combined with enterprise and improvements in technology.
While enterprise and improvements in technology are hard to measure, they will see diminished returns with more government and greater regulatory controls. In the developed world, it is difficult to point to measures where these have been made easier and all too simple to see areas where they have been intensified.
In the case of investment the picture is clearer. As a share of GDP, investment in the EU, US and Japan has failed to recover to its pre-2008 levels. China by contrast has seen this share continue to grow (India, the other emerging titan, was in the same position but appears to have seen a dip in 2013-14).
Because the economic fraternity represented by IMF is dominated by the Keynesian fiscal stimulus and Friedmanite monetary stimulus schools, it fails to see the link between the capacity of an economy to produce and its level of growth. It is therefore constantly baffled by the continued failure of economies to recover.
No amount of fiscal of monetary pump priming will provide anything but a temporary fillip to the real level of income. Growth depends on investment that creates additional value (not, of course, the negative value that occurs with subsidised investments – tariff protected manufacturing in the old days, renewable energy in these hip times).
The mainstream macro-economics fraternity as characterised by the IMF and OECD therefore represents not just a waste of money but, in so far as they influence government policy, a positive menace to prosperity.
In Australia, Joe Hockey has been preening himself on his economic management and damning those who see a downside as “clowns”. Although Australian GDP did see better growth than in most developed economies in the first quarter of 2015, it was only at 2-3 per cent. Much of this is due to the position our miners have earned as raw material suppliers to Chindia. And unlike other developed countries, the momentum of investment in mining meant that as a share of GDP this increased up until 2012.
However Australia’s previously strong investment picture is now under is a major cloud. Data released in the past few weeks showed expected new private sector capital investment falling – perhaps by as much as 25 per cent. This is an ominous warning of the economy’s fragility that reinforces calls for lower spending and deregulation – possibly the opposite of what the IMF would counsel. Australia can hitch a ride with the high growth Asian nations but we cannot sleepwalk our way towards prosperity.