IMF: From ‘Washington Consensus’ to ‘Soak the Rich’

Even the IMF has moved on from the 80s-vintage "Washington Consensus." Trump, however, still adores it.

In many ways, Donald Trump is a throwback to the past. Unfortunately, he wishes to bring back a lot of what was regrettable and not desirable about the past: militarism, racism, sexism, etc. Even in the international economic realm, he's a throwback to the 80s (your choice: 1980s, 1880s, 1780s or even before that) in bashing massive trade deficits with Japan, wishing for the "return" of American manufacturing, re-prioritizing the burning of fossil fuels over renewable energy sources and so on.

Instead of acting on his populist campaign promises to reduce inequality, Trump has actually brought about a lot of the things which reinforce it: Giving corporations massive tax cuts which working-class citizens will have to pay for in the future, gutting healthcare benefits provided by the state, selecting an education secretary whose cause is eviscerating public education in favor of private education...the list goes on and on.

Strangely enough for us at the IPE Zone, one of the international financial institutions that has long championed Trumpified, inequality-increasing policies no longer seems to be doing so. The IMF once pushed "Washington Consensus"-style policies that were said to worsen inequality by assuming that wealth will inevitably trickle down after liberalization, deregulation and privatization. These were, of course, massively controversial policies. I have colleagues who've made entire websites devoted to criticizing the IMF over such policies taht are still going strong. Sure, inequality may increase in the short run, the theory went, but in the long run more would benefit. The implication is that inequality itself should not be the focus of policy attention.

Actually, what Trump actually does nowadays--pursue policies widening inequality even further--is contrary to modern IMF policy prescriptions (at least in writing). Has this onetime bastion of economic orthodoxy gone all Marx on us? On fiscal policy, a report which came out late last year explained:

Rising inequality and slow economic growth in many countries have focused attention on policies to support inclusive growth. While some inequality is inevitable in a market-based economic system, excessive inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth. This Fiscal Monitor discusses how fiscal policies can help achieve redistributive objectives. It focuses on three salient policy debates: tax rates at the top of the income distribution, the introduction of a universal basic income, and the role of public spending on education and health.

Does the IMF really advocate "soak the rich" policies now? In so many words, yes, via the euphemism "progressive taxation" which it now regards as a positive with few caveats by deriding its opposite:

A substantial share of the differences in inequality across economic groups and over time can be attributed to differences in redistributive fiscal policies. In advanced economies, direct taxes and transfers reduce income inequality on average by about one-third, with three-quarters of this reduction achieved through transfers. In developing economies, fiscal redistribution is  much more limited, reflecting lower and less progressive taxation and spending and greater reliance on regressive indirect taxes.

You can read the rest, but the implications are clear: IMF member states should make inequality reduction a core concern in the interests of generating growth regardless of whether it's equitable or not. Taxing the rich more is part of the policy prescription package [gulp!]. By contrast, Trump is "Washington Consensus" in full pomp. The point is that if even a supposedly ideological and insulated institution can change, it remains to be seen if Trump can. After all, he is still, like Steve Spears who I have a much higher opinion of, stuck in the 80s.