Posts Tagged ‘IMF’

Since I’ve referred to the International Monetary Fund as both “the Dumpster Fire of the Global Economy” and “the Dr. Kevorkian of Global Economic Policy,” readers can safely conclude that I’m not a fan of the international bureaucracy. My main gripe is that senior bureaucrats routinely make the mistake of bailing out profligate governments (often as a back-door way of bailing out banks that foolishly lent to those governments), and they compound that mistake by then insisting on big tax hikes.

But as I’ve noted when writing about international bureaucracies, the professional economists who work for these organizations often produce very good work.

And that’s true even for the IMF. The bureaucracy published a study a few years ago entitled “The Size of Government and U.S.–European Differences in Economic Performance” and it has some useful and interesting conclusions. Here are some excerpts, along with my observations. We’ll start with the question the authors want to answer.

How much of a drag is the modern welfare state on economic performance? … One standard approach has been to estimate the disincentive effects of taxes and deduce that lower taxes would imply higher welfare. However, in the context of modern democracies, this argument begs the question why voters prefer an inferior economic outcome (a higher tax burden) instead of voting for parties that would minimize taxes.

Actually, we don’t need to “beg the question.” We get bad policy because voters get seduced into voting for politicians who promise to pillage the “rich” and give goodies to everyone else. And since voters generally don’t understand that this approach leads to “an inferior economic outcome,” the process can continue indefinitely (or until the ratio between those pulling the wagon and those riding in the wagon gets too imbalanced).

But I’m digressing. Let’s get back to the main focus of the study. The authors note that Europe isn’t converging with the United States, which is what standard economic theory says should be happening.

The academic debate over the long-term failure of European countries to catch up with U.S. economic performance also points to the need for a better assessment of the economic effects of large governments. Over the last three decades, European countries have not made inroads in closing a gap in per capita income vis-à-vis the US. …This paper focuses on…the role of the size of the public sector… The literature studying the impact of government on economic performance is large. Theory has focused on welfare effects—stressing the distortionary impact of taxation and government spending… observed government sizes generally tend to be too large, thus depressing welfare in many countries, or actual policies depart from allocationally optimal ones, especially in the “Rhineland-model” European economies.

And here are some of the results.

… a higher tax wedge results in lower hours worked. Moreover, the equation can be used to predict hours worked as a function of the tax wedge. …based on these calibrations, and using the welfare measure described in Appendix II, the steady-state welfare effects of varying the size of government can be analyzed. Table 2 provides the results of two such thought experiments: (i) to cut the marginal tax rate by five percentage points and (ii) to adopt U.S. taxation levels (in both accompanied by offsetting changes in spending), with the welfare change measured in the incremental consumption equivalent of the tax cuts. For example, had Belgium between 1990–99 cut marginal income tax rates by five percentage points, it would have reaped a welfare gain equivalent to 7⅓ percent of aggregate consumption (or of 21 percent if it had adopted US tax levels). These are large potential welfare gains from cutting back government.

Here’s a table from the study showing the theoretical gains from lowering tax rates, either by 5-percentage points, or all the way down to American levels.

But the authors note that their model is incomplete, with some countries doing better than what’s implied by their fiscal systems.

The basic model has considerable difficulties in accounting for labor supply in very high-tax countries, which it frequently underpredicted (e.g., the Nordic countries, excluding Norway…). …One group comprising Sweden and Denmark… Both countries are often singled out as countries with large government, but, as seen in the previous, both also have higher than predicted labor supply in the baseline model.

The study tries to explain such differences by considering whether some governments spend money in an effective manner on “active labor market policies” that produce higher levels of labor supply.

Perhaps that’s a partial explanation, but I think there’s a much simpler way of making sense of the data. The Nordic nations, as I’ve repeatedly written, have strongly pro-market policies once fiscal policy is taken out of the equation.

So if you just look at fiscal policy, they should be way behind the United States. But since they are more market-oriented than America in other areas (trade, rule of law, regulation, and monetary policy), that shrinks the gap.

That being said, I’m not going to be too critical of the IMF study since it does reach a very sensible conclusion.

…the size of government does play a significant role in explaining lower European labor supply…the size of European governments appears to imply large welfare costs. …Moreover, government policies that do not directly increase the size of government, e.g., regulation, are observed to also impart significant costs.

By the way, don’t assume this IMF study is an outlier. When economists at international bureaucracies are free to do real research without interference by their political masters, it’s not uncommon for them to produce sensible results.

Last but not least, here’s the video I narrated on the “Rahn Curve” and the growth-maximizing size of government.

Now if we could just get Hillary Clinton and Donald Trump to understand this research, we’ll be in good shape (actually, since those two are poster children for the theory of Public Choice, who am I kidding?).

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I must be perversely masochistic because I have the strange habit of reading reports issued by international bureaucracies such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation and Development.

But one tiny silver lining to this dark cloud is that it’s given me an opportunity to notice how these groups have settled on a common strategy of urging higher taxes for the ostensible purpose of promoting growth and development.

Seriously, this is their argument, though they always rely on euphemisms when asserting that politicians should get more money to spend.

  • The OECD, for instance, has written that “Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people.”
  • The Paris-based bureaucrats of the OECD also asserted that “now is the time to consider reforms that generate long-term, stable resources for governments to finance development.”
  • The IMF is banging on this drum as well, with news reports quoting the organization’s top bureaucrat stating that “…economies need to strengthen their fiscal frameworks…by boosting…sources of revenues.” while also reporting that “The IMF chief said taxation allows governments to mobilize their revenues.”
  • And the UN, which has “…called for a tax on billionaires to help raise more than $400 billion a year” routinely categorizes such money grabs as “financing for development.”

As you can see, these bureaucracies are singing from the same hymnal, but it’s a new version.

In the past, the left agitated for higher taxes simply in hopes for having more redistribution.

And they’ve urged higher taxes because of spite and hostility against those with high incomes.

Some folks on the left also have supported higher taxes on the theory that the economy’s performance is boosted when deficits are smaller.

But now, they are advocating higher taxes (oops, excuse me, I mean they are urging “resource mobilization” to generate “stable resources” so there can be “financing for development” in order to “strengthen fiscal frameworks”) on the theory that bigger government is the way to get more growth.

You probably won’t be surprised to learn, however, that these reports from international bureaucracies never provide any evidence for this novel hypothesis. None. Zero. Zilch. Nada. The null set.

They simply assert that governments will be able to make presumably wonderful growth-generating “investments” if politicians can squeeze more money from the private sector.

And I strongly suspect that this absence of evidence is deliberate. Simply stated, international bureaucracies are willing to produce shoddy research (just look at what the IMF and OECD wrote about the relationship between growth and inequality), but there’s a limit to how far data can be tortured and manipulated.

Especially when there’s so much evidence from real scholars that economic performance is weakened when government gets bigger.

Not to mention that most sentient beings can look around the world and look at the moribund economies of nations with large governments (such as France, Italy, and Greece) and compare them with the better performance of places with smaller government (such as Hong Kong, Switzerland, and Singapore).

But if you read the aforementioned reports from the international bureaucracies, you’ll notice that some of them focus on getting more growth in poor nations.

Perhaps, some statists might argue, government is big enough in Europe, but not big enough in poorer regions such as sub-Saharan Africa.

So let’s look at the numbers. Is it true that governments in the developing world don’t have enough money to provide core public goods?

The answer is no.

But before sharing those numbers, let’s look at some historical data. A few years ago, I shared some research demonstrating that countries in North America and Western Europe became rich in the 1800s and early 1900s when the burden of government spending was very modest.

One would logically conclude from this data that today’s poor nations should copy that approach.

Yet here’s the data from the International Monetary Fund on government expenditures in various poor regions of the world. As you can see, the burden of government spending in these areas is two or three times larger than it was in America and other nations that when they made the move from agricultural poverty to middle class prosperity.

The bottom line is that small government and free markets is the recipe for growth and prosperity in all nations.

Just don’t expect international bureaucracies to share that recipe since one of the obvious conclusions is that we therefore don’t need parasitical bodies like the IMF, OECD, World Bank, and UN.

P.S. Unsurprisingly, Hillary Clinton also has adopted the mantra of higher-taxes → bigger government → more growth.

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I’m not a fan of the International Monetary Fund. The bureaucracy was created in 1944 to manage and coordinate the system of fixed exchange rates created as part of the 1944 Bretton Woods agreement. But once fixed exchange rates disappeared, the over-funded bureaucracy cleverly adopted a new rationale for its existence and its main role now is to bail out insolvent nations (what that really means, of course, is that it exists to bail out big banks that foolishly lend money to profligate third-world governments).

As part of this new mission, the IMF acts like the Pied Piper of tax hikes. The bureaucrats parachute into nations, refinance and restructure the debt of those countries, and insist on a bunch of tax increases in hopes that more revenue will then be available to service the new debt.

Needless to say, this is not exactly a recipe for growth and prosperity. The private sector in these countries gets hammered with tax increases, the big banks in rich nations get indirect bailouts, and the real problem of bloated government generally is left to fester and metastasize.

This is why I’ve referred to the IMF as the Dr. Kevorkian of the global economy. But the bureaucracy is bad for other reasons. It also has decided that it should grade all nations on their economic policies and it routinely uses that self-assigned authority to recommend big tax hikes all over the world. Including lots of tax increases in the United States.

The IMF even tries to interfere with American elections. Just recently, the chief bureaucrat of the organization launched a not-too-subtle attack on Donald Trump.

Though in this case, which involved trade barriers, the IMF actually is on the right side (the bureaucracy generally has a pro-tax bias, but the one big exception is that it favors lower taxes on global trade).

Anyhow, the IMF’s Managing Director warned that additional protectionist taxes on global trade threaten the global economy. And even though she didn’t specifically mention the Republican nominee, you can see from the various headlines I’m sharing that reporters put 2 + 2 together and realized that Ms Lagarde was criticizing Trump.

And he deserves condemnation. The post-World War II shift to lower trade taxes has been a big victory for economic freedom (indeed, tariff reductions have helped offset the damage caused by increasingly bad fiscal policy over the past several decades).

Nonetheless, there is something quite unseemly about an international bureaucracy taking sides in an American election (who do they think they are, the IRS?). Especially since American taxpayers underwrite the biggest share of the IMF’s activities.

Let’s look specifically at an analysis of the IMF’s actions from the UK-based Guardian.

The managing director of the International Monetary Fund, has launched a thinly veiled attack on the anti-free-trade sentiments expressed by US presidential candidate Donald Trump… Lagarde made it clear she strongly opposed the Republican candidate’s policies, which include higher US tariffs and a barrier along the border with Mexico. …“There is a growing risk of politicians seeking office by promising to ‘get tough’ with foreign trade partners through punitive tariffs or other restrictions on trade…” She added that throughout history there had been arguments about trade. “But history clearly tells us that closing borders or increasing protectionism is not the way to go…”

By the way, while I agree with her comments on trade, her comments about a “barrier along the border with Mexico” reek of hypocrisy.

Christine Lagarde criticises his policies including plans for…a US-Mexico border wall.

Those who have visited the IMF’s lavish headquarters can confirm that there is a very heavily guarded barrier separating the IMF from the hoi polloi and peasantry of Washington.

Call me crazy, but a bureaucracy with lots of security to prevent unauthorized people from entering its building is in no position to lecture a nation for wanting security to prevent unauthorized people from crossing its borders. And I say this as someone who generally favors immigration.

But let’s set that issue aside. There’s actually a very serious sin of omission in the IMF’s analysis that needs to be addressed.

The international bureaucracy (correctly) opposes trade taxes and wants to build on the progress of recent decades by further reducing government-imposed barriers to cross-border economic activity. As noted above, this is the right position and I applaud the IMF’s defense of lower tariffs and expanded trade.

That being said, the level of protectionism has fallen significantly in the post-World War II era. In other words, trade taxes already are reasonably low. Yes, it would be better if they were even lower (ideally zero, like in Hong Kong).

My problem (or, to be more accurate, one of my problems) with the IMF is that the bureaucracy acts as if the world economy is hanging in the balance if there’s some sort of increase in the currently low tax burden on trade.

Yet what about the tax burden on behaviors that actually generate the income people use to purchase goods from other nations? Top tax rates on personal income average more than 40 percent in the developed world, dwarfing the average tariffs of trade.

And the burden on income that is saved and invested is even higher because of double taxation, which is especially destructive since all economic theories – including Marxism and socialism – agree that capital formation is a key to long-run growth and higher living standards (i.e., the ability to buy more goods, including those produced in other nations).

So here’s the question that must be asked: If it is bad to have very modest taxes on the share of people’s income that is used to buy goods produced in other nations, then why isn’t it even worse to have very onerous taxes on the productive behaviors that generate that income?

In other words, if the IMF is correct (and it is) to criticize Trump for threatening to increase the modest tax rates that are imposed on global trade, then why doesn’t the IMF criticize Hillary Clinton for threatening to increase the rather harsh tax rates that are imposed on working, saving, and investment?

Maybe Madame Lagarde’s army of flunkies and servants (one of the many perks she gets, in addition to a munificent tax-free salary) can explain that sauce for a goose is also sauce for a gander.

By the way, I can’t resist addressing one final aspect to this story. The Guardian‘s report notes that Lagarde wants to offset the supposedly harmful impact of trade by further increasing the size and scope of government.

…the solution was for governments to provide direct financial support for those with low skills through higher minimum wages, more generous welfare states, investment in education and a crackdown on tax evasion.

Wow, that’s a lot of economic illiteracy packed into one sentence fragment.

Now you understand why I refer to the IMF as the dumpster fire of global economics.

P.S. While the IMF likes to push bad policy for the United States, the bureaucracy’s proposals for China are akin to a declaration of economic warfare.

P.P.S. The IMF’s flip-flop on infrastructure spending reveals a lot about the bureaucracy’s inner workings.

P.P.P.S. While the IMF often produces sloppy and dishonest research, every so often the professional economists on the staff slip something  useful past the political types. Though my all-time-favorite bit of IMF research was the study that inadvertently showed why a value-added tax is so dangerous.

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The International Monetary Fund is a left-leaning bureaucracy that was set up to monitor the fixed-exchange-rate monetary system created after World War II.

Unsurprisingly, when that system broke down and the world shifted to floating exchange rates, the IMF didn’t go away. Instead, it created a new role for itself as self-styled guardian of economic stability.

Which is a bit of a joke since the international bureaucracy is most infamous for its relentless advocacy of higher taxes in economically stressed nations. So much so that I’ve labeled the IMF the Dr. Kevorkian of the world economy.

Or if that reference is a bit outdated for younger readers, let’s just say the IMF is the dumpster fire of international economics. Heck, if I was in Beijing, I would consider the bureaucracy’s recommendations for China an act of war.

To get an idea of the IMF’s ideological bias, let’s review it’s new report designed to discredit economic liberty (a.k.a., “neoliberalism” in the European sense or “classical liberalism” to Americans).

Here’s their definition.

The neoliberal agenda—a label used more by critics than by the architects of the policies— rests on two main planks. The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition. The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.

The authors describe the first plank accurately, but they mischaracterize the second plank.

At the risk of nitpicking, I would say “neoliberals” such as myself are much more direct than they imply. We want to achieve “a smaller role for the state” by reducing the burden of government spending.

Sure, we want to privatize government-controlled assets, but that’s mostly for reasons of economic efficiency rather than budgetary savings. And because we care about what actually works, we’re fans of spending caps rather than balanced budget rules.

But let’s set all that aside and get back to the report.

The IMF authors point out that governments have been moving in the right direction in recent decades.

There has been a strong and widespread global trend toward neoliberalism since the 1980s.

That sounds like good news.

And the report even includes a couple of graphs to show the trend toward free markets and limited government.

And the bureaucrats even concede that free markets and small government generate some good results.

There is much to cheer in the neoliberal agenda. The expansion of global trade has rescued millions from abject poverty. Foreign direct investment has often been a way to transfer technology and know-how to developing economies. Privatization of state-owned enterprises has in many instances led to more efficient provision of services and lowered the fiscal burden on governments.

But then the authors get to their real point. They don’t like unfettered capital flows and they don’t like so-called austerity.

However, there are aspects of the neoliberal agenda that have not delivered as expected. …removing restrictions on the movement of capital across a country’s borders (so-called capital account liberalization); and fiscal consolidation, sometimes called “austerity,” which is shorthand for policies to reduce fiscal deficits and debt levels.

Looking at these two aspects of neoliberalism, the IMF proposes “three disquieting conclusions.”

I’m much more worried about stagnation and poverty than I am about inequality, so part of the IMF’s analysis can be dismissed.

Indeed, based on the sloppiness of previous IMF work on inequality, one might be tempted to dismiss the entire report.

But let’s look at whether the authors have a point. Are there negative economic consequences for nations that allow open capital flows and/or impose budgetary restraint?

They argue that passive financial flows (indirect investment) can be destabilizing.

Some capital inflows, such as foreign direct investment—which may include a transfer of technology or human capital—do seem to boost long-term growth. But the impact of other flows—such as portfolio investment and banking and especially hot, or speculative, debt inflows—seem neither to boost growth nor allow the country to better share risks with its trading partners… Although growth benefits are uncertain, costs in terms of increased economic volatility and crisis frequency seem more evident. Since 1980, there have been about 150 episodes of surges in capital inflows in more than 50 emerging market economies…about 20 percent of the time, these episodes end in a financial crisis, and many of these crises are associated with large output declines… In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality. …there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to—or compound—a financial crisis. While not the only tool available—exchange rate and financial policies can also help—capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad.

I certainly agree that there have been various crises in different nations, but I’m wondering whether the IMF is focusing on the symptoms rather than the underlying diseases.

What happened in the various nations, for instance, to trigger sudden capital flight? That seems to be a much more important question.

In some cases, such as Greece, the problem obviously isn’t capital flight. It’s the reckless spending by Greek politicians that created a fiscal crisis.

In other cases, such as Estonia, there was a bubble because of an overheated property market, and there’s no question the economy took a hit when that bubble popped.

But there’s a very strong case that Estonia’s open economy has generated plenty of strong growth over the years to compensate for that blip.

And it’s worth noting that criticisms of Estonia’s market-oriented policies often are based on grotesque inaccuracies, as was the case when Paul Krugman tried to blame the 2008 recession on spending cuts that occurred in 2009.

So I’m very skeptical of the IMF’s claim that capital controls are warranted. That’s the type of policy designed to insulate governments from the consequences of bad policy.

Now let’s shift to the fiscal policy issue. The IMF report correctly states that “Curbing the size of the state is another aspect of the neoliberal agenda.”

But the authors make a big (perhaps deliberate) mistake by then blaming neoliberals for adverse consequences associated with the “austerity” imposed by various governments.

Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment. …in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point.

The problem with this analysis is that it doesn’t differentiate between tax increases and spending cuts.

And since much of the “austerity” is the former variety rather than the latter, especially in Europe, it borders on malicious for the IMF to blame neoliberals (who want less spending) for the economic consequences of IMF-endorsed policies (mostly higher taxes).

Especially since research from the European Central Bank and International Monetary Fund (!) show that spending restraint is the pro-growth way of dealing with a fiscal crisis.

Let’s now look at what the IMF authors suggest for future policy. More taxes and spending!

…policymakers should be more open to redistribution than they are. …And fiscal consolidation strategies—when they are needed—could be designed to minimize the adverse impact on low-income groups. But in some cases, the untoward distributional consequences will have to be remedied after they occur by using taxes and government spending to redistribute income. Fortunately, the fear that such policies will themselves necessarily hurt growth is unfounded.

Wow, the last couple of sentences are remarkable. The bureaucrats want readers to believe that a bigger fiscal burden of government want have any adverse consequences.

That’s a spectacular level of anti-empiricism. I guess they want us to believe that nations such as France are economically stronger economy than places such as Hong Kong.


Last but not least, here’s a final excerpt that’s worth sharing just because of these two sentences.

IMF Managing Director Christine Lagarde said the institution believed that the U.S. Congress was right to raise the country’s debt ceiling “because the point is not to contract the economy by slashing spending brutally now as recovery is picking up.”  …Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.

We’re supposed to believe the IMF is guided by evidence when the chief bureaucrat relies on Keynesian theory to make a dishonest argument. I wish that “slashing spending” was one of the options on the table when the debt limit was raised, but the fight was at the margins over how rapidly the burden of spending should climb.

But if Lagarde can make that argument with a straight face, I guess she deserves her massive tax-free compensation package.

P.S. Since IMF economists have concluded (two times!) that spending caps are the most effective fiscal rule, I really wonder whether the authors of the above study were being deliberately dishonest when they blamed advocates of lower spending for the negative impact of higher taxes.

P.P.S. I was greatly amused in 2014 when the IMF took two diametrically opposed positions on infrastructure spending in a three-month period.

P.P.P.S. The one silver lining to the dark cloud of the IMF is that the bureaucrats inadvertently generated some very powerful evidence against the VAT.

P.P.P.S. Let’s close with something positive. IMF researchers last year found that decentralized government works better.

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I thought the Organization for Economic Cooperation and Development had cemented its status as the world’s worst international bureaucracy when it called for a Keynesian spending binge even though the global economy is still suffering from previous schemes for government “stimulus.”

But the International Monetary Fund is causing me to reconsider my views.

First, some background about the IMF. Almost all of the problems occur when the political appointees at the top of the organization make policy choices. That’s when you get the IMF’s version of junk science, with laughable claims about inequality and growth, bizarrely inconsistent arguments about infrastructure spending, calls for massive energy taxes,

By contrast, you do get some worthwhile research from the career economists (on issues such as spending caps, fiscal decentralization, and the Laffer Curve).

But that kind of professional analysis gets almost no attention. The IMF’s grossly overpaid (and untaxed!) Managing Director seemingly devotes all her energy to pushing and publicizing bad policies.

The Wall Street Journal reports, for instance, that the IMF is following the OECD down the primrose path of fiscal recklessness and is also urging nations to throw good money after bad with another Keynesian spending spree.

The world’s largest economies should agree to a coordinated increase in government spending to counter the growing risk of a deeper global economic slowdown, the International Monetary Fund said Wednesday. …the IMF is pushing G-20 finance ministers and central bankers meeting in Shanghai later this week to agree on bold new commitments for public spending.

Fortunately, at least one major economy seems uninterested in the IMF’s snake-oil medicine.

The IMF’s calls will face some resistance in Shanghai. Fiscal hawk Germany has been reluctant to heed long-issued calls by the U.S., the IMF and others to help boost the eurozone’s weak recovery with public spending.

Hooray for the Germans. I don’t particularly like fiscal policy in that nation, but I at least give the Germans credit for understanding at the end of the day that 2 + 2 = 4.

I’m also hoping the British government, which is being pressured by the IMF, also resists pressure to adopt Dr. Kevorkian economic policy.

The International Monetary Fund has urged the UK to ease back on austerity… IMF officials said the Treasury had done enough to stabilise the government’s finances for it to embark on extra investment spending… The Treasury declined to comment on the IMF report. The report said: “Flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth.” …Osborne has resisted attempts to coordinate spending by G20 countries to boost growth, preferring to focus on reducing the deficit in public spending to achieve a balanced budget by 2020.

But you’ll be happy to know the IMF doesn’t discriminate.

It balances out calls for bad policy in the developed world with calls for bad policy in other places as well. And the one constant theme is that taxes always should be increased.

I wrote last year about how the IMF wants to sabotage China’s economy with tax hikes.

Well, here are some excerpts from a Dow Jones report on the IMF proposing higher tax burdens, tax harmonization, and bigger government in the Middle East.

The head of the International Monetary Fund on Monday urged energy exporters of the Middle East to raise more taxes… “These economies need to strengthen their fiscal frameworks…by boosting non-hydrocarbon sources of revenues,” Christine Lagarde said at a finance forum in the United Arab Emirates capital. …Ms. Lagarde called on the Persian Gulf states to introduce a valued added tax, which, even at a relatively low rate, could lift gross domestic product by 2%, she said. …Ms. Lagarde, who on Friday clinched a second five-year term as the IMF’s managing director, also urged governments in the region to consider raising corporate income taxes and even prepare for personal income taxes. Income taxes in particular could prove a sensitive move in the Gulf, which in recent decades has attracted millions of workers from abroad by offering, among other things, light-touch tax regimes. Ms. Lagarde also wants to discourage “overly aggressive tax competition” among countries that allow international companies and wealthy individuals to shift their wealth to lower tax destinations.

Wow, Ms. Lagarde may be the world’s most government-centric person, putting even Bernie Sanders in her dust.

She managed, in a single speech, to argue that higher taxes “strengthen…fiscal frameworks” even though that approach eventually leads to massive fiscal instability. She also apparently claimed that a value-added tax could boost economic output, an idea so utterly absurd that I hope the reporter simply mischaracterized her comments and that instead she merely asserted that a VAT could transfer an additional 2 percent of the economy’s output into government coffers. And she even urged the imposition of income taxes, which almost certainly would be a recipe for turning thriving economies such as Dubai back into backward jurisdictions where prosperity is limited to the oil-dependent ruling class.

And it goes without saying that the IMF wants to export bad policy to every corner of the world.

The IMF chief said taxation allows governments to mobilize their revenues. She noted, however, that the process can be undermined by “overly aggressive tax competition” among countries, and companies abusing the system of international taxation. …She argued that the automatic exchange of taxpayer information among governments could make it harder for businesses to follow the scheme.

And don’t forget that the IMF oftentimes will offer countries money to implement bad policy, like when the bureaucrats bribed Albania to get rid of its flat tax.

P.S. Now perhaps you’ll understand why I was so disappointed that last year’s budget deal included a provision to expand the IMF’s authority to push bad policy around the world.

P.P.S. In other words, American taxpayers are being forced to subsidize the IMF so it can advocate higher taxes on American taxpayers! Sort of like having to buy a gun for the robber who wants to steal your money.

P.P.P.S. Though I’ll also be grateful that the IMF inadvertently and accidentally provided some very powerful data against the value-added tax.

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I very rarely feel sympathy for the people of Greece. Indeed, events over the past five years have even led me to write that “I hate the Greeks.”

I also disparaged the people of Greece by stating on TV that they’ve been trying to loot and mooch their way through life.

So you can see that I generally believe in the tough-love approach.

But there comes a point when even a curmudgeon like me is going to say enough is enough and that the Greek people have suffered enough already.

And I had that experience yesterday. Check out this headline from a story in yesterday’s EU Observer.

Economic advice from the French government?!? Isn’t that a bit like asking the Chicago Cubs for suggestions on how to win the World Series?

What are the French advisers going to do, propose ways to make the government even bigger? Suggest ways of driving even more entrepreneurs out of the country?

For Heaven’s sake, this is the last thing the people of Greece need.

Sort of reminds me of a headline I saw attached to a report by Reuters a few years ago.

Geesh, the Greeks already suffered because of an invasion by people working for the German government back in the 1940s. Seems like another deployment of German bureaucrats would be adding insult to injury.

Particularly since it would create the worst of all worlds, marrying Teutonic tax efficiency (for example, taxing prostitutes with parking meters) with Greek profligacy (for example, subsidies for pedophiles).

I’m not sure where that would end, but it surely wouldn’t be a good place.

Now let’s make a more serious point about tough love and Greek suffering.

Back in early 2010, about the time the Greek fiscal crisis was becoming a big issue, I warned that a bailout would actually make things worse. I suggested it would be better to let Greece default, both because it would penalize foolish investors who lent too much money to the Greek government and because it would force Greece to live within its means.

That would have meant short-run pain, to be sure, but I think that approach would have involved the least amount of aggregate suffering.

But the political class ignored my helpful advice and instead decided that bailouts would be a better idea. But how has that worked out? The Greek economy has been moribund and the Greek people are now saddled with far more debt. Yes, some short-run pain was mitigated, but only at the cost of much more pain over the past few years (with more pain in the future).

Interestingly, the International Monetary Fund’s top economist unintentionally has confirmed my analysis. Here’s some of what Olivier Blanchard recently posted as part of an effort to defend the IMF’s choices back in 2010.

Had Greece been left on its own, it would have been simply unable to borrow. …Even if it had fully defaulted on its debt, given a primary deficit of over 10% of GDP, it would have had to cut its budget deficit by 10% of GDP from one day to the next.  These would have led to much larger adjustments and a much higher social cost.

Blanchard obviously thinks reducing government spending by 10 percent of GDP would have imposed too much “social cost,” but imagine if Greece had bitten the bullet back in 2010. Sort of like what Estonia did in 2009.

Yes, there would have been a challenging adjustment. Interest groups would have received fewer handouts. Greek bureaucrats would have lost jobs and/or had their pay reduced. Payments to vendors would have been delayed. State-run TV may have been shut down. The regulatory apparatus probably would have been cut back. And I’m sure the Greek government probably would have raised taxes as well.

Now imagine how much better off Greece would be today if it went with that approach.

We don’t have a parallel universe where we can see the results of that different approach, but consider the fact that Estonia had a deeper downturn than Greece, presumably in part because it undertook strong measures, but since that time has been Europe’s fastest-growing economy.

Greece, by contrast, has been Europe’s slowest-growing economy. Hmmm…seems like this should be part of any discussions about “social cost.”

So what lessons can we learn?

I realize there are lots of factors that determine economic performance and that it’s impossible to isolate the impact of either Estonia’s spending-cut policy or Greece’s bailout policy. But it would take a very bizarre and untenable set of assumptions to conclude that Estonia didn’t make smarter policy choices.

The only silver lining to Greece’s dark cloud is that it’s not too late to do the right thing.

P.S. Since we ended by speculating about the good results of my tough-love approach, let’s also enjoy some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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When I wrote the other day that the Organization for Economic Cooperation and Development was the worst international bureaucracy, I must have caused some envy at the International Monetary Fund.

One can imagine the tax-free bureaucrats from the IMF, lounging at their lavish headquarters, muttering “Mitchell obviously hasn’t paid enough attention to our work.”

And they may be right. The IMF has published some new research on inequality and growth that merits our attention. I hoped it would be a good contribution to the discussion, but I was disappointed (albeit not overly surprised) to see that the authors put ideology over analysis.

Widening income inequality is the defining challenge of our time. …Equality, like fairness, is an important value.

Needless to say, they never explain why inequality is a more important challenge than anemic growth.

Moreover, they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.

And they certainly don’t define “fairness” in an adequate fashion.

But let’s not get hung up on the rhetoric. The most newsworthy part of the study is that these IMF bureaucrats produced numbers ostensibly showing that growth improves if more income goes to those at the bottom 20 percent.

…we find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.

And this correlation leads them to make a very bold assertion.

…there does not need to be a stark efficiency-equity tradeoff. Redistribution through the tax and transfer system is found to be positively related to growth for most countries.

Followed by some policy suggestions for more class-warfare tax policy to finance additional redistribution.

…the redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation… In addition, reducing tax expenditures that benefit high-income groups most and removing tax relief—such as reduced taxation of capital gains, stock options, and carried interest—would increase equity.

Those are some bold leaps in logic that the authors make. And we’ll look at some new, high-quality research on the efficiency-equity tradeoff below, but first let’s consider the IMF’s supposed empirical findings on growth and income.

Several questions spring to mind:

  • Did they cherry pick the data? Why look at the relationship between growth and income gains in the previous five years rather than one year, three years, or ten years?
  • Why do they assume the correlation they found in the five-year data somehow implies causation for future growth? Roosters crow before the sun comes up, after all, but they don’t cause sunrises.
  • Was there any attempt to look at other hypotheses? One thing that instantly came to my mind was the possibility that recessions often are preceded by easy-money policies that create asset bubbles. And since those asset bubbles tend to artificially enrich savers and investors with higher incomes, perhaps that explains the correlation in the IMF’s data.
  • Perhaps most important, why assume that faster income growth for the bottom 20 percent automatically means there should be more redistribution through the tax and transfer system? Maybe that income growth is the natural – and desirable – outcome of good Hong Kong-type policies?

There are all sorts of other questions that could and should be asked, but let’s now shift to the IMF’s bold assertion that their ostensible correlation somehow proves that there’s no tradeoff between growth (efficiency) and redistribution (equity).

Kevin Hassett of the American Enterprise Institute investigated the degree to which Arthur Okun was right about a tradeoff between growth and redistribution.

Forty years ago, the economist Arthur Okun wrote a seminal book with a self-explanatory title: Equality and Efficiency: The Big Tradeoff.  …Okun’s tradeoff seems to be forgotten by many on the left, who advocate expanded government spending at every turn… What is needed is some kind of controlled experiment.. When the financial crisis began, countries varied tremendously in the extent to which they redistributed income. Some, such as Ireland and Sweden, redistributed a lot; others, such as the U.S. and Switzerland, not so much. Now, seven years later, some countries have recovered smartly. Others have not. If we go back and sort countries by how much they redistributed before the crisis, how does the growth experience compare? …The vertical axis plots how much redistribution there was in each country in 2008. The horizontal axis plots the rate of per capita national-income growth that each country averaged during the four years between 2008 and 2012. In some sense, then, the chart asks the question, “To what extent does variation in the size of the welfare state in 2008 explain variation in how economies recovered from the crisis between 2008 and 2012?” …As one can see in the chart, …the data show a clear pattern: the heavy redistributors have done much worse.

And here’s Kevin’s chart, and it clearly shows the redistribution-oriented nations had relatively slow growth (the top left of the chart).

The bottom line is that Kevin’s hypothesis and data are much more compelling that the junky analysis from the IMF.

But you don’t need to be an expert in economic jargon or statistical analysis to reach that conclusion.

Just look around the globe. The real-world evidence is so strong that only an international bureaucrat could miss it. The nations that follow the IMF’s advice, with lots of redistribution and class-warfare taxation, are the ones that languish.

After all, Greece, Italy, and France are not exactly role models.

While jurisdictions such as Hong Kong and Singapore routinely set the standard for growth.

And nations with medium-sized welfare states, such as Switzerland, Australia, and the United States, tend to fall in the middle. We out-perform Europe’s big-government economies, but we lag behind the small-government economies.

Let’s close by looking at some additional findings from the IMF study.

I was actually surprised to see that the bureaucrats admitted that inequality (more properly defined as some people getting richer faster than others get richer) was the natural result of positive economic developments.

We find that less-regulated labor markets, financial deepening, and technological progress largely explain the rise in market income inequality in our full sample over the last 30 years.

So why, then, is “inequality” a “defining challenge”?

Needless to say, the IMF never gives us a good answer.

I also was struck by this passage from the IMF study.

Figure 18 indicates that rising pre-tax income concentration at the top of the distribution in many advanced economies has also coincided with declining top marginal tax rates (from 59 percent in 1980 to 30 percent in 2009).

And here is the chart, which the IMF would like you to believe is evidence that lower tax rates have contributed to inequality (even though the bureaucrats already admitted that natural forces have led some to get richer faster than others).

Yet this chart simply shows that supply-siders were right. Reagan, Kemp, and other tax cutters argued that lower tax rates would lead rich people to earn – and declare – more taxable income.

And that’s exactly what happened!

Heck, I’ve already shared incredibly powerful data from the IRS on this occurring during the 1980s in the United States, so it’s no surprise it happened in other nations as well.

But I don’t want to be reflexively critical of the IMF. The study did have some useful data.

And there was even one very good recommendation for helping the poor by cutting back on misguided anti-money laundering laws.

Country experiences also suggest that policies such as granting exemptions from onerous documentation requirements, requiring banks to offer basic accounts, and allowing correspondent banking are useful in fostering inclusion.

Since I’ve written that anti-money laundering laws are ineffective at fighting crime while putting costly burdens on those with low incomes, I’m glad to see the IMF has reached the same conclusion.

And here’s a chart from the IMF study showing how poor people are less likely to have accounts at financial institutions.

By the way, the World Bank has produced some very good research on how the poor are hurt by inane anti-money laundering rules.

So kudos to some international bureaucracies for at least being sensible on that issue.

But speaking of international bureaucracies, I started this column by joking about the contest to see which one produced the worst research with the worst recommendations.

And while the IMF’s new inequality study definitely deserves to be mocked, I must say that it’s not nearly as bad as the drivel that was published by the OECD.

So our friends in Paris can rest on their laurels, confident that they do the best job of squandering American tax dollars.

P.S. Since I pointed out that the IMF inadvertently ratified one of the key tenets of supply-side economics, let’s remember that the IMF also confirmed one of the key reasons to oppose a value-added tax.

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