The IMF Criticizes Bush’s Economic Policy

Yesterday the IMF released a paper called “U.S. Fiscal Policies and Priorities for Long-Run Sustainability.” In it, the IMF delivers a surprisingly sharp criticism of the Bush administration’s fiscal policy. It’s the first time that I’m aware of that the IMF has criticized US policy in such strong terms. You can find the paper here, but I’ll give you a few highlights:

  • The stimulus effect of current fiscal policy will taper off and be replaced by higher interest rates, crowding out of investment, and therefore lower productivity growth in the US: “In one simulation, for example, the tax cuts would eventually lower U.S. productivity—in terms of labor output per hour—by ½ percent in the long run.”
  • This harmful increase in interest rates will affect the rest of the world, too: “Simulations reported in Section II suggest that a 15 percentage point increase in the U.S. public debt ratio projected over the next decade would eventually raise real interest rates in industrial countries by an average of ½–1 percentage point.”
  • The US is racking up a dangerous amount of foreign debt: “The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years—an unprecedented level of external debt for a large industrial country (IMF, 2003b).
  • Social security is at serious risk: “The fiscal imbalance [over the next 75 years, including future entitlement liabilities] is as high as $47 trillion, nearly 500 percent of current GDP… Closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits.”

The IMF’s conclusion is that it is not quite too late to avoid a fiscal disaster in the US… but that time is quickly running out, and the negative consequences of failure will be severe, both for the US and for the rest of the world.

This is all old hat to readers of Angry Bear, I’m sure. So what may be most significant about this report is simply that the IMF was willing to be so critical of the Bush administration’s fiscal policy management. The IMF is traditionally directed to a fair degree by the US Treasury Department, and rarely (never?) criticizes the US, as a result. I guess that tradition didn’t hold true this time.