Why Is The IMF So Obsessed About Growth?

| About: Vanguard Total (VT)

By Valentin Schmid

How do you know when you are obsessed about something? The dictionary definition states you have an idea or thought that is constantly on your mind.

At its annual meetings last week, the International Monetary Fund [IMF] showed it is absolutely obsessed with economic growth. At the presentation of the World Economic Outlook and its prediction for global growth, the word "growth" occurred 37 times, more than any other. Add another 22 occurrences at the press conference of managing director Christine Lagarde and 16 at a conference regarding financial stability and you can safely say the institution is obsessed with growth.

"My hope at the end of the Annual Meetings is that each Finance Minister, each Governor of the Central Bank, will go back home thinking what can I do in order to propel that growth, which is currently too low for too long, benefiting too few," Mrs. Lagarde said at a conference on Oct. 6.

Growth Isn't Necessary

Economic growth is good in principle. Companies invest and generate a return on the capital invested through increased economic output and productivity. More jobs, more goods, more of everything.

However, it is worthwhile to note an economy doesn't need to grow under all circumstances and at any price, especially not when narrowly defined as growth in GDP, a flawed statistical concept. This is mostly true for developed economies: Like a tree that has reached its full height, the economy doesn't need to grow to provide for all of its citizens.

The oldest tree in the world is called Old Tjikko, lives in Sweden, and scientists say it's 9,550 years old. It stopped growing a long time ago and is in great shape. It just settled into a natural rhythm without the ambition to grow into the sky.

This principle is working in places like Japan with a shrinking population where total GDP has hardly budged over the last ten years, but GDP per capita went up because of increases in productivity. There is the problem of distribution of income but that's a different problem and also present when the economy is growing at 10 percent, like in China over the past decade.

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Growth in the United States and Europe has been too slow according to the IMF (IMF)

Automation and a highly skilled workforce enable a fraction of the population to provide for the rest, regardless of whether it's shrinking or growing. In the United States, less than one-third of the population has a full-time job and can easily provide for everybody else.

Emerging economies, on the other hand, cannot provide for all of their populace and therefore need to grow until they are fully developed, like a young tree that hasn't reached its full potential.

Even the growth addicts at the IMF probably understand that the earth has finite resources and can host a finite number of people, so by definition, growth must end at some point.

Real Reason for Growth Addiction

The real reason why the fund and the governments behind it want to stimulate growth at any cost is because of the enormous debt burden the developed world especially has amassed. It's $152 trillion at the end of 2015, or 225 percent of world GDP, according to the fund.

This debt carries interest and interest can only be paid if there is some return or growth to show for it. In a functioning economy, capital should naturally generate a return, and if not, it has to be written off as a failed project to make space for something new.

However, in the new normal, it is out of fashion to admit mistakes or write down bad debt. So the debt keeps on sloshing around, jamming balance sheets and keeping central banks, governments and the IMF busy to find an artificial solution to this old problem. Japan with its total debt load higher than 400 percent of GDP is somewhat ironically the worst example in this case.

Also, many a government in the developed world would be hard pressed to admit it cannot pay its pension and social security obligations without growth in the tax base (GDP) and new people joining the labor force to pay into the social security system. Old Tjikko doesn't have that problem.

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Debt cannot be repaid without growth in total GDP. (IMF)

However, the IMF is an institution large enough to come up with different ideas to solve the problem, even though they may not show up prominently at the annual meetings. In a 2013 paper, IMF analysts propose a 10 percent wealth tax to reduce the debt burden. It would effectively take assets from a creditor to extinguish liabilities of a debtor and therefore reduce debt in the system.

Although difficult to implement in practice, a wealth tax or simple debt forgiveness is akin to chopping branches off a tree to give the other branches and leaves more room to grow.