Greece’s depression is IMF’s idea of ‘progress’

The International Monetary Fund congratulated itself last week for the splendid job it is doing in Greece, declaring the country “is making progress in overcoming deep-seated problems.” With an unemployment rate of 27.2 percent, an economy that has shrunk by at least 20 percent and children going hungry, one has to shudder at the thought of what a lack of success might look like.

Temple of Zeus photo by Andreas Trepte (

Temple of Zeus photo by Andreas Trepte (

The depression in Greece is the logical conclusion of austerity, but while Greece is the first in Europe to arrive it is not alone — the composite eurozone unemployment rate reached a record 12.1 percent in March. The eurozone unemployment rate rose to 24 percent for men and women below the age of 25; the European Union-wide rate is nearly as high.

The IMF’s solution? Eliminate more jobs. In its latest report on Greece, issued on May 3 following its latest inspection visit, the IMF graciously mentioned that Greece’s wealthy don’t pay taxes:

“Very little progress has been made in tackling Greece’s notorious tax evasion. The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension.”

But the IMF report quickly followed up by grumbling that:

“[T]he over-staffed public sector has been spared, because of a taboo against dismissals.”

Perhaps you will not fall off your chair in shock, but it is the latter of these two concerns that gets the attention when the IMF gave its verdict on what it expects the Greek government to do:

“A strong recovery will need to be built primarily on deepening structural reforms. … The government’s welcome public commitment to improving the business environment and accelerating privatization now needs to be matched with results.”

Diktats masquerading as democracy

Those bland-sounding words take on deeper meaning when we examine the “structural reforms” already imposed on Greece by the IMF, the European Commission and the European Central Bank, the “troika” that dictates Greek policy. In February 2012, for instance, the Greek government agreed to reduce the already low minimum wage by more than 20 percent, to freeze all public-sector wages until the unemployment rate falls below 10 percent and to deep cuts in pensions.

The Greek minimum wage is €751 per month (equivalent to US$990 or £636). How well could you live on such a sum?

Overall, wages have fallen 40 percent and health care spending has been cut 25 percent. Meanwhile, most of the money released by the troika goes straight back to lenders, not for internal relief. As a result of this austerity, it is no surprise that retail sales in Greece have declined by 30 percent over the past three years and an estimated 150,000 small businesses have closed. Poverty has become so widespread that an estimated 10 percent of Greek’s children go to school hungry.

All this in a country where its biggest and wealthiest industry, shipping, pays no taxes — its tax-free status guaranteed in the constitution. Greece’s wealthy pay little or no taxes, stashing their cash outside the country. Government employees are the people who can’t evade paying their taxes — yet they are the ones scapegoated for economic troubles. (A common pattern in many countries.)

The IMF made no mention of its own role in bringing about this depression in the May 3 report, instead blaming a “lack of confidence” for Greece’s struggles:

“Looking over the period 2010–2012, the much deeper than expected recession was overwhelmingly due to a progressive loss of confidence. … With fiscal adjustment set to remain a drag on GDP growth for several years to come, the key challenge is to generate the improvement in confidence needed for a recovery in investment to begin to more than offset this drag. This cannot happen unless Greece can secure broad domestic support for the program and the political stability that would come with this.”

Yes, if only Greeks would believe that hunger is a sign of progress, everything would be better! In lieu of a sudden spasm of optimism, generating “broad support” for bleeding the country dry to pay back financiers who made reckless gambles might be difficult.

Ideology masquerading as economics

Although it might be tempting to note that doing the same thing over and over while expecting different results is unreasonable, reasonableness is besides the point here: Austerity programs are designed with ideology in mind, not with economics based on the real world. One clue to this is that “structural re-adjustment” programs invariably demand sell-offs of public assets — holding fire sales of state enterprises means private capital can scoop them up at very low prices, and profit nicely from doing so at public expense.

The neoliberal concept is that people exist to serve markets rather than markets existing to serve people. Entire countries have been harnessed to the dictates of “markets.” This has long been the pattern imposed by the North on the South through institutions like the IMF; now the stronger countries of the North are imposing it on their weaker neighbors. Taxpayers in those stronger countries are on the hook, also, as some of their taxes go toward the bailout funds, for which bailed-out countries are merely a conduit to pass the money to financiers, often from their own country. Much of the money Europeans lent to Greece was used to bail out German and French speculators.

The race to the bottom, of which austerity programs and the continual shifting of production to locations with ever lower wages constitute crucial components, represents an intensification of market dominance over human life. It is also a result of a scramble to maintain profits, which have been under continual pressure from the economic crisis.

But neoliberalism is not the product of a cabal “hijacking” economies or governments; it is the natural progression of a system that insists “markets” should be the arbiter of all human problems and the model for social relations and institutions. Capitalist markets are not neutral abstractions perched loftily above the Earth; they are the aggregate interests of the wealthiest industrialists and financiers as expressed through the corporations and other institutions they control.

“Markets” dictate that school children faint at their desk due to hunger while billionaires grab ever more. We can do better than this.

Never mind! IMF now says austerity mistakes don’t matter

It did seem too good to be true. The International Monetary Fund last week issued its second paper in three months acknowledging that the damaging effects of austerity measures on economies is much stronger than previously assumed. Unlike October’s quiet admission of error, however, this time IMF researchers say colossal miscalculations don’t matter.

Perhaps the IMF is taking back the bureaucratically couched, quiet mea culpa it genteelly issued last October? Being an orthodox economist evidently means never having to say you are sorry. It does mean that if reality doesn’t match the theory, then it is reality that must be changed.

Readers may recall that in October 2012 the IMF slipped into its World Economic Outlook, in which it forecast that the global economic growth rate would continue to decline, this interesting line:

“Public spending cutbacks and the still-weak financial system [are] weighing on prospects.”

That is as close to an admission as we are likely to receive from the IMF, the World Bank or other financial institutions that the austerity that they relentlessly impose weakens economies. Perhaps some at the IMF are getting cold feet at such an admission, or, more likely, such ideologically inconvenient pronouncements received more attention than expected given the tepid language buried in an otherwise routine paper.

Thus we have last week’s interesting development, in which two IMF researchers published a further study on the IMF web site that confirmed the catastrophic mis-calculations in applying austerity, but concluded that the mistakes don’t matter and austerity must be imposed anyway. As a hedge, the paper’s front page declares it is not an official IMF document and does not necessarily represent the viewpoints of the IMF.

The IMF did see fit to publish the paper and one of the authors is its director of research, so let’s nonetheless take it seriously. As seriously as an ideological paper can be taken, even if its pre-selected conclusion is masked by jargon and mathematical formulae, and clearly intended for an audience of professional economists. There is no reason for us not to peer over their shoulders, especially as austerity has very real implications for us.

Swing an axe, get bloodletting

This debate over austerity revolves around assumptions as to the effect of spending cuts. As I wrote in my October 10 post on the IMF’s quiet confession:

“[I]t seems that governments applying austerity programs over-estimated the savings to be accrued from them. The IMF said a common figure used by governments was to assume that for each dollar lost in government spending, 50 cents is erased from gross domestic product, an assumption used when creating austerity budgets. But, the fund said, its study of the issue has found that, since the economic collapse that began in 2008, for each dollar cut from government spending, GDP is reduced from 90 cents to $1.70. In other words, the result of austerity is that it has accelerated economic contraction.”

A simple look around us confirms that finding. Stagnation or renewed economic contraction is the continuing result in the world’s advanced capitalist countries. Eurozone unemployment, for example, has risen to 11.8 percent.

Sidestepping any examination of ideological bias — not surprisingly, since that would implicate the IMF itself not to mention the entire universe of orthodox economists — authors Olivier Blanchard and Daniel Leigh refer only to “growth forecast errors” and offer a series of ideas as to the source of these innocent errors. The authors’ calculations found nearly identical errors as those mentioned two paragraphs above in calculating the effects of imposed austerity since the onset of the global economic crisis in 2008. From that, they write:

“In other words … growth disappointments should be larger in economies that planned greater fiscal cutbacks. This is what we found.” [page 3]

These “disappointments” were significant — the authors said the extra loss, beyond economists’ calculations, was nearly one percent of economic output for each one percent cut in spending, a result they found consistently in the more than two dozen countries they analyzed. Similarly bad forecasts were made by the European Commission, the Organisation for Economic Co-operation and Development and the IMF. Nonetheless, the authors conclude:

“[O]ur findings that short-term fiscal multipliers have been larger than expected do not have mechanical implications for the conduct of fiscal policy. Some commentators interpreted our earlier box as implying that fiscal consolidation should be avoided altogether. This does not follow from our analysis.” [page 6]

Finding a tree instead of a forest

Among the reasons offered for the “errors” in calculating the net effects of austerity programs are that zero interest rates can’t be cut further; that consumption is more dependent on current income than future income due to the tightening of credit; and the effect of cuts become amplified when “there is a great deal of slack in the economy.” The last of those three lead the IMF researchers to conclude that the “errors” in calculating economic effects only apply from the onset of the 2008 collapse; before that everything was fine.

Unless you lived in a developing country in which IMF-imposed austerity was applied. The authors likely do not. But, for now, they acknowledge that the “errors” in the effect of spending cuts for 2008 and beyond resulted in forecasters consistently under-estimating the rise in unemployment and the decline in demand. In the fifth year of economic crisis, the IMF researchers wrote:

“[W]e find that planned fiscal consolidation is associated with significantly lower-than-expected consumption and investment growth. … [I]nvestment varies relatively strongly in response to overall economic conditions.” [page 18]

Um, well, yes. When wages decline and unemployment rises, demand is reduced and corporations would rather sit on their cash, buy back their stock or speculate. Why should they invest when they have trouble selling what they already produce? In advanced capitalist countries, consumer spending accounts for 60 to 70 percent of the economy and if working people don’t have the money, they aren’t going to spend it if they are also trying to reduce their debt. Debt accumulated because that was the only way they could maintain living standards when wages have stagnated or declined since the 1970s.

The competitive pressures on corporations to increase their profits leads them to move production to the places with the lowest wages; that buoys profits for a time but the resulting fall in wages and rise in unemployment in the places where production is shuttered means weaker demand. Weaker demand results in increased pressure on profits, and round and round we go. Austerity, at bottom, is governments enforcing the demands of the most powerful industrialists and financiers for ever more profits.

Competitive pressures force corporations to act in such a manner, and the immense capital accumulated by the biggest capitalists grants them decisive power, ensuring that their interests become paramount when governments implement policy. The International Monetary Fund and World Bank are multi-national instruments of the most powerful capitalist governments, which in turn reflect the aggregate interests of their most powerful industrialists and financiers. If we keep that in mind, we need not fall off our chairs when an IMF paper, having laid out the damage done by austerity programs, nonetheless concludes:

“[O]our results should not be construed as arguing for any specific fiscal policy stance in any specific country. In particular, the results do not imply that fiscal consolidation is undesirable. Virtually all advanced economies face the challenge of fiscal adjustment in response to elevated government debt levels and future pressures on public finances from demographic change.” [page 20]

Thus the dramatic conclusion: The economic decline resulting from austerity has been badly under-estimated; therefore we must have more austerity. Ideology this may be, but it’s an ideology concocted to continue capitalist business as usual — it’s not an ideology that inexplicably drops from the sky. The dismal “science” indeed.

Quietly, the IMF confesses that austerity does not work

Don’t say it too loudly, because it doesn’t want you to know: The International Monetary Fund admits that austerity is not working.

The IMF of course did not come out and say this directly. But it was there, unmistakably, in its World Economic Outlook published on its web site on October 9. Forecasting the world economic growth rate to continue to decline, the IMF genteelly noted that:

“Public spending cutbacks and the still-weak financial system [are] weighing on prospects.”

And please don’t complain about the bureaucratically tepid language —  you didn’t expect an IMF official to call a press conference and apologize? No you didn’t. But that is as clear an admission as we are likely to get from the horse’s mouth that cutbacks, the magic snake oil that the IMF, World Bank and other financial institutions relentlessly impose, weakens economies.

For the record, the IMF projects 2012 growth in the world’s advanced capitalist countries will be 3.3 percent and forecasts growth of 3.6 percent for 2013, both slower than 2010 or 2011. It predicts a similar rate of decline in growth among the world’s developing countries. But let’s take note of two passages in the outlook.

“The IMF said that its forecast rested on two crucial policy assumptions—that European policymakers get the euro area crisis under control and that policymakers in the United States take action [to] tackle the “fiscal cliff” and do not allow automatic tax increases and spending cuts to take effect. Failure to act on either issue would make growth prospects far worse.”

The “fiscal cliff” is the congressional agreement made earlier this year that, barring superseding action by the U.S. Congress and president, a series of steep automatic cuts to federal-government spending kicks in at the end of the year — austerity imposed by one’s own von Neumann machine. Concurrently, the IMF believes that government investment is not necessarily a bad thing:

“The main driver [of growth in Asia] will be China, where activity is expected to receive a boost from accelerated approval of public infrastructure projects.”

So why do central bankers, financiers and multi-national financial institutions still preach austerity? Ideology, surely, plus arrogance and a lack of ability to admit the wisdom of financial elites is wrong. Nonetheless, at bottom such people are carrying out their class interests. If we had a different, more egalitarian economic system, and somebody came along and said, “Let’s immiserate entire countries so that a handful of financiers could remain fabulously wealthy by guaranteeing their profits” you would see the idea as insane. And it is.

There was one other tidbit — it seems that governments applying austerity programs over-estimated the savings to be accrued from them. The IMF said a common figure used by governments was to assume that for each dollar lost in government spending, 50 cents is erased from gross domestic product, an assumption used when creating austerity budgets. But, the fund said, its study of the issue has found that, since the economic collapse that began in 2008, for each dollar cut from government spending, GDP is reduced from 90 cents to $1.70.

In other words, the result of austerity is that it has accelerated economic contraction. A commentary on the Naked Capitalism web site written by a financial-industry professional caustically sums up what that re-calculation means:

“In case you missed it, this is an admission of complete and utter incompetence.”

IMF officials probably won’t be calling a press conference to admit that, either. The results of austerity across Europe has been devastating:

  • 25 percent unemployment in Spain.
  • 15 percent economic contraction in Ireland.
  • Population exodus out of Lithuania and Latvia.
  • 40 percent wage cuts and 22 percent economic contraction in Greece.

Unemployment has risen and wages reduced in the advanced capitalist countries. Demand is inevitably soft because of that — a vicious circle when 60 to 70 percent of economic activity is accounted for by consumer spending. Each country would like to get out of this impasse by exporting more, but the slowdown in economic growth has not spared any corner of the world. And although some countries might export more than they import, it is a zero-sum game — every country can’t be a net exporter.

One way to boost exports is to devalue your currency, but, here again, every country can’t devalue in relation to all others. China, Japan, Switzerland and the United States each has intervened in foreign-exchange markets in order to devalue their currencies (this is done through large-scale trading, not administrative fiat), but these actions can only go so far.

A critical problem for countries like Greece and Spain is that they don’t have their own currency, so, for them, the euro is over-valued. When imbalances force devaluation on a country, some of that devaluation can be achieved when its currency declines in value against others. But for users of the euro, all the devaluation has to come internally, through wage reductions, government spending cuts and destruction of capital values. Capitalism is a system of relentless competition in which only so many can be winners.

That competition tends to be seen through national lens; thus the form in Europe has been German bankers and politicians wagging disapproving fingers at Mediterranean neighbors. That distorted vision obscures the fact that it is only German industrialists and financiers who have benefitted; German workers have endured a decade of declining wages. And now that austerity has been relentlessly imposed in its eurozone customers, a decline in exports can’t be made up by internal demand thanks to those declining wages.

Eventually, austerity bites back — the IMF forecasts the composite eurozone economy to contract this year and increase by 0.2 percent in 2013, and Germany to grow by a mere 0.9 percent this year and next after posting four percent growth as recently as 2010. The German government has kept dissent down by acknowledging the sacrifices made by German workers, a point made repeatedly by the country’s mass media in the context of whipping up national feelings and directing those feelings against “profligate” countries on the eurozone’s southern rim.

It was thus a promising sign that the leader of Die Linke (the German Left Party), Bernd Riexinger, attended the October 9 demonstrations in Athens with Alexis Tsipras, the leader of Greece’s main Left opposition coalition, Syriza. Austerity is a cross-national offensive by financiers and industrialists to maintain their power and wealth at all costs. The response to austerity can only be cross-national. Capital does not care about borders and nations; similarly, working people can only reverse the devastating attacks on them through linking hands across borders.