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IMF SUPPORTS OBAMA STANCE.

By Christopher | December 30, 2008

The Wall Street Journal www.wsj.com  carries a column from its own Bob Davis bob.davis@wsj.com underlining the IMF’s general support for the proposed Obama credit crunch policy. The IMF is an interesting study because it is broadly aganst industry specific handouts but is in favour of some other general market stimulus. I must say I share the IMF view because although I have a lifelong passion for my own automotive industry and am pleased for GM and Chrysler for the money so far pumped in by George Bush, I think we are on thin ice pleading a special case on the jobs front. Far better we seek general financial incentives – such as the availability of credit – and then prove we can survive in that climate than we look like a special case-pleading lame duck.

Christopher Macgowan

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 WASHINGTON — The International Monetary Fund’s top economist generally endorsed the incoming Obama administration’s approach to economic stimulus, and urged countries to consider offering a kind of “recession insurance” to companies and individuals.

Obama

Associated Press

President-elect Barack Obama smiles during his news conference introducing members of his economic team, Monday, Nov. 24, 2008, in Chicago.

President-elect Barack Obama’s economic team is weighing a stimulus plan that would cost somewhere between $675 billion and $775 billion over two years, and would be used largely for construction and other government spending. The package is likely to include a temporary tax cut of as much as $1,000 for middle-income families.

Olivier Blanchard, the IMF’s chief economist, said “the size corresponds roughly to what we think is needed.” He backed the Obama approach of targeted tax cuts, saying the money should go to consumers who are “truly credit constrained.”

In an accompanying research paper, Mr. Blanchard and three other IMF economists advised against broad cuts in corporate tax rates, dividends and capital gains — Republican favorites — which they judge “likely to be ineffective” because profits are low. The changes “are often difficult to reverse,” they added.

In an interview, Mr. Blanchard said a general tax cut may be less effective than other measures because many consumers would save the money.

IMF recommendations rarely have much clout in the U.S., but the timing of the paper and Mr. Blanchard’s comments may make a difference, as the Obama team is looking to present its plans as responsible and widely acceptable.

STIMULUS RECIPE

According to the IMF, here is what governments should and should not do.

DO

–Frontload spending on existing projects.

–Increase maintenance spending

–Expand unemployment benefits

–Target tax credits to “credit constrained” consumers

DON’T

–Increase wages of government workers

–Increase subsidies to specific industries

–Reduce rates on corporate taxes, dividends or capital gains

–Increase tariffs

Source: IMF

More

The findings pose another hurdle for Republicans. Former Bush White House economist Glenn Hubbard argues that despite the IMF findings, a broad corporate tax cut would spur investment and boost stock prices.

Not all the IMF’s comments supported Mr. Obama. Mr. Blanchard warned plans to bail out car companies could prompt a trade fight if other nations tried to match or exceed U.S. aid. He said countries should focus on providing credit in the case of corporate restructurings.

Mr. Blanchard, on leave from the Massachusetts Institute of Technology, has long done research with Mr. Obama’s chief economic adviser, Lawrence Summers. A spokeswoman for the Obama transition office didn’t comment on the IMF findings, but said “economists across the ideological spectrum agree that the danger is doing too little to get our economy moving again, not too much.”

The IMF has long urged China to take similar steps to boost its economy. Overall, the IMF has been campaigning for a global stimulus plan of 2% of world gross domestic product — or more than $1 trillion.

Among the IMF’s proposals is a kind of “recession insurance.” Under that plan, individual governments would offer insurance to firms and individuals that would pay off if GDP sank below a certain level.

“Widespread use of such [recession insurance] contracts would provide an additional automatic stabilizer because payments would be made when they are most needed, namely in bad times,” the IMF paper said.

With such instruments, Mr. Blanchard acknowledged, potential buyers might worry whether, during a downturn, governments would make the payouts.

Write to Bob Davis at bob.davis@wsj.com

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