IMF Agrees: Austerity Bites

Sen. Todd Akin calls for abortion on demand and free distribution of condoms. The CEO of Exxon decries global warming and demands an end to oil company subsidies along with new public investment in renewable energy. Arizona Sheriff Joe Arpaio calls for amnesty for undocumented workers.

Not likely, right? But the equivalent of these improbables just took place in international economics. The International Monetary Fund, for decades famed for inflicting harsh austerity policies on developing nations, now says, "Never mind," essentially admitting it got it wrong.

IMF Director Christine LaGarde is calling on European nations to ease austerity measures before they cause another global recession. "The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity," the Financial Times reports [1].

This extraordinary recognition of reality by the IMF raises an obvious question: Will Republican presidential candidate Mitt Romney and Republicans get a clue? The IMF's call is a direct repudiation of the harsh austerity policies it has been peddling. Just like the IMF, Romney is passionate about deep cuts [2] in federal spending as well as tax reforms [3] that do not lower revenues. (He claims now that he wants to lower rates across the board, but pay for them completely by closing loopholes.)

In addition, Romney and his running mate, Rep. Paul Ryan, rail against the Federal Reserve for printing money, for taking extraordinary measures to keep long-term interest rates low. They wax hysterical about the inflation ogre that is about to materialize at any moment and lay waste to the economy.

Romney even sent out a fundraising email [4] savaging the Fed, claiming its newest round of "quantitative easing" was "another bailout." That "Barack Obama is at it again -- spending your tax dollars to bail out his failed economic plan... money we can't afford for jobs we will never see."

Now, all of this is simply nonsense. Barack Obama has nothing to do with the Fed policy. The Federal Reserve is notoriously independent of the administration and Congress (and its chairman, Ben Bernanke, is a Republican economist who is basically pursuing what conservative guru Milton Friedman advocated: an aggressive monetary policy to counter recessionary currents). And the Fed isn't "spending your tax dollars." In fact, the Fed has been paying billions in profits back into the Treasury, reducing deficits – not adding to them. And we don't have to "afford the money" because the Fed is basically printing it.

Romney's combination of slashing spending and hiking interest rates would drive up unemployment, spread poverty and probably end up adding to deficits, as the economy moves back towards recession. Romney argues that the "confidence" that would come from his election would counter these effects. Don't bet the store on that. (There are precious few businesses that will bet even a new salary on it.)

Getting it Right

Last fall, President Obama called for passage of the American Jobs Act, which included investments in rebuilding schools and infrastructure, rehiring teachers and cops, and a jobs corps for veterans, among other things. It would be paid for by tax hikes on the wealthiest Americans. Independent analysts, such as Macroeconomic Advisers, estimated [5] that it would create 2.1 million additional jobs.

Republicans – committed to slashing spending and austerity – killed [6] the bill in the House, and filibustered it in the Senate.

The IMF turn is a big deal. If nothing else, it should be a wake-up call to governments and candidates across the world. The IMF is saying, essentially, that Obama got it right.

Will Romney, Ryan and Republicans get it? Will the "Gang of Eight" senators meeting with Alan Simpson and Erskine Bowles, the Archdruids of austerity, take another look? Will Democrats stop plotting a grand bargain and start talking once more about how to get people back to work and the economy moving?

The Real Deal

In its latest World Economic Outlook (PDF [7]), the Fund explicitly warns against "excessive fiscal contraction in the short term," while reiterating calls for a plan -- including tax and entitlement reforms – that places "government debt on a sustainable path in the medium term." Contrary to Romney and Republican's braying on deficits, the U.S. doesn't have a short-term deficit crisis. We aren't Greece, and won't ever be.

The U.S. has to get the economy moving and then take sensible measures to makes its projected debt sustainable. That should involve progressive tax reform, raising taxes on the wealthy to produce more revenue. That's just the reverse of the Romney plan to lower rates, eliminate the estate tax and sustain the capital gains and carried interest tax loopholes that benefit the very wealthy (and enable him to pay a 14 percent [8] tax rate).

And it should involve reforms to get our health-care spending, the driver of our long term debt problems, under control. Here, too, Romney and Ryan just get it wrong. This isn't about gutting Medicare and Medicaid. It's about fixing health care. Ryan's budget slashes Medicaid and turns Medicare into a voucher, doing nothing to control rising costs, only pushing more and more of them onto the very people least able to afford them: seniors, the disabled, the poor, the dying.

What we must address is reform of our broken health care system, which otherwise will bankrupt everything – companies, governments and families. That requires continuing on the path begun with Obamacare, which started to change how we deliver health care and put limits on insurance company excesses. Eventually, after exhausting all other alternatives, we'll get to where every other industrial country has ended up, with exactly what Republicans go nuts about: a "government takeover" of health care. Either through far more extensive regulation (think negotiating bulk discounts for prescription drugs, for example) or through extending a Medicare-like system across the population, we'll get there. If we spent what other industrial countries spend per capita on health care (with better public health results), we would RIGHT NOW be projecting surpluses [9] as far as the eye can see.

The bastion of high finance, the IMF, has come out against austerity. Can Mitt be far behind? Look forward to the next debate, when Romney's new "etching" will no doubt have him denouncing the president for his jobs program, while suddenly offering up his own version to get the economy going.