Seeking to build a better world for whatever followed the Second World War, in 1944 the United States led the reconstruction of an international financial system.  The so-called “Bretton Woods System” included the International Monetary Fund (IMF).  The IMF’s mission is “to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”  Basically, this meant helping countries that had got themselves into a financial jam.  Give them money in return for spending and tax reforms. 

In recent years, says the IMF, tax cuts and increased spending in the United States have led to large budget deficits.  Donald Trump sponsored a substantial temporary tax cut; Trump and Joe Biden both sponsored spending bills to deal with the economic effects of Covid; Biden sponsored a stimulus bill; in 2021 Congress passed the substantial infrastructure bill; Biden sponsored generous additional spending to subsidize the development of semi-conductor manufacturing in the United States; and Biden has lavished money on shifting from carbon-based energy to other “green” sources. 

These deficits have been financed by borrowing.  Government spending then pumps money into the economy.  As a counter-cyclical measure to fight off a recession, such policies make sense.  However, says the IMF, the American economy is suffering from inflation attended by high levels of growth, consumption, and expanding employment, not a recession. 

Two problems arise in this view.  On the one hand, the deficit spending creates “short-term risks to the disinflation process” being pursued by the Federal Reserve Bank.  That is, the government is blunting the work of the high-interest policy being used to reduce inflation.[1]  Second, the scale of the borrowing “is out of line with long-term fiscal stability.”[2]  That is, one of these days, big spending cuts and tax increases will be necessary to prevent bankruptcy. 

“That’s ridiculous,” replied several spokespeople for the Biden administration.  According to Jared Bernstein, chairman of President Biden’s Council of Economic Advisers, “I don’t think that the recent inflation story supports an excessive demand story…. We’ve been able to maintain historically low unemployment while getting significant disinflation.”  According to a Brookings Institution report, the Covid stimulus came to an end about the time that the new deficit spending began.  Hence it did not increase the large deficits of those year, merely kept them at about the same level.[3]  Many of the recent price increases (car insurance, home insurance, medical services, financial services, and housing prices) are one-time bumps, says the White House. 

What if Bernstein is making the best case for his boss and the economists at the IMF are correct?  The IMF has no dog in this fight.  They’re just used to sorting out banana republics. 

[1] The rapid pace of efforts to reduce—not reverse—inflation undertaken by the Federal Reserve Bank brought rapid progress.  Until they didn’t.  According to the NYT, “new data show that progress stalling out and, by many measures, beginning to reverse.”  Earlier this week, the Federal Reserve Board declined to cut interest rates.  It did not suggest that it would raise rates again.  What with an election looming. 

[2] Jim Tankersley, “Split Beliefs on Dug-In Inflation and the Deficit’s Influence On It,” NYT, 30 April 2024. 

[3] Although I think that was the IMF’s point.