Inside the IMF’s Ideology

Lots of questions and only one answer: Let the government fix it
October 13, 2017 12:52, Last Updated: October 19, 2017 11:05

Like central banks, the International Monetary Fund (IMF) is puzzling to many. Those on the left typically see it as a symbol of unbridled crony capitalism, and those on the right think it’s a bunch of bureaucrat central planners trying to take over the world. Both may be correct.

Observing the fund’s annual meetings this October, however, the bureaucrat central planning aspect is stronger, at least in the fund’s public communication and research.

Commenting on relatively robust growth in the private sector, the IMF, in its World Economic Outlook survey, had a few bones to pick. The fund called on national governments and international institutions to fix a range of issues.

Chief economist Maurice Obstfeld sees a “window for action” to solve income and wealth inequality, for example. He calls for higher taxes, financial regulation, government investment in infrastructure and education, the promotion of innovation, and a better social safety net.

And of course, he calls for more of the wise, centrally planned monetary policy enacted by central banks, although he did say he doesn’t have an answer as to which policy exactly.

IMF Managing Director Christine Lagarde echoed this sentiment, saying governments should “fix the roof while the sun is shining.” Even calls for strengthening trade didn’t call for governments to get out of the way of private trade, but rather for them to provide more rules and frameworks.

The IMF’s head of fiscal affairs, Vitor Gaspar, touted a universal basic income, a massive government redistribution scheme, and, again, more spending on education and infrastructure, while keeping a stable budget and reducing debt. This, of course, is only possible by raising taxes, which he and Lagarde think is not an issue. “There is room for increasing top [tax] rates without decreasing growth,” Gaspar said.

Higher Taxes for the Rich

The call for higher taxes infuriated the Trump administration, which is currently working on a sweeping proposal for tax cuts. Comments by Obstfeld, when asked about U.S. tax cuts, did not help (although he may have a point). “Policymakers need to think long term, which is often not normal for politicians,” he said.

In the real world, outside the headquarters of the IMF in Washington, low-tax countries like Switzerland, Liechtenstein, and Singapore are doing relatively well compared to high-tax countries like France, which had to shelve its confiscatory tax plans under President François Hollande to avoid a mass exodus of wealthy people and companies.

For some reason the IMF thinks taxes are low in developed countries and raising them is not an issue. (IMF)

Also, Gaspar believes in the old Keynesian myth that governments can time the business cycle, spending when the economy is down and building buffers when the economy is up—which never happens, especially not during the recent recovery in which almost all countries have kept piling on debt eight years after the recession ended in 2009.

He says that “tax is necessary to ensure [governments] have the capacity to serve their public debt and have access to credit markets” and “fiscal policy should avoid pro cyclicality.” It never does.

On the other hand, neither Lagarde nor Obstfeld nor Gaspar mentioned private enterprise, the free market, or individual entrepreneurialism even once.

So in case you were confused as to which economic philosophy rules the IMF, this year’s meetings should dispel any doubt that the fund is stuck in believing and promoting Keynesian economics, a philosophy that has been debunked by economists right and left.