“Milton Friedman isn’t running the show anymore,” Joe Biden said in a 2020 campaign interview while pledging to greatly scale up public investment. The comment was striking as the University of Chicago economist Milton Friedman represents a branch of economics, the Chicago School, that has dominated fiscal policy in Washington for the last four decades.
Friedman called on governments around the world to prioritize deficit-reduction above all else, even if it meant forgoing higher levels of public investment. Since the 1990s, this has been considered by both major political parties in Washington as the standard for a stable economy. Biden’s explicit promise to break with this orthodox approach marks a historic inflection point in mainstream thinking about economic policy.
At any other point during the last forty years, such sizable spending increases would have been kneecapped—by both parties.
Even more remarkably, Biden followed through. He set aside Friedman’s warnings against deficit spending—which he viewed as wasteful—and secured three major increases in public investment passed by Congress: the nearly $1 trillion Infrastructure Investment and Jobs Act (IIJA), which added $550 billion in new investment in physical infrastructure over five years; the nearly $500 billion Inflation Reduction Act (IRA), focused on energy security and climate change, and the $280 billion CHIPS and Science Act, focused on microchips production. Together, these mark the largest increase in public investment since President Franklin D. Roosevelt’s New Deal reforms in the 1930s and President Lyndon B. Johnson’s Great Society reforms in the 1960s.
In doing so, Biden has reintroduced classic Keynesian policies, in which public spending is designed to stimulate the economy through beneficial multiplier effects that unfold over time: increased technical innovation, productivity growth, GDP growth, employment, and tax revenues. For example, estimates of the multiplier effects in future years generated from Biden’s policies all suggest they will expand the economy over time.
At any other point during the last forty years, such sizable spending increases would have been kneecapped—by both parties—in the name of Friedman’s fiscal restraint.
But it seems that Biden’s support for Keynesian policies stops at the U.S. border.
Recent International Monetary Fund (IMF) loan documents for dozens of developing countries reveal that the majority of the loan conditions call for fiscal austerity and reductions in public spending and investment—the opposite of Biden’s policies at home. A 2022 study, for example, found that the IMF expects 143 countries to be engaged in fiscal austerity in 2023, comprising nearly 85 percent of the world population, or more than 6.3 billion people. The United States has the leading seat on the IMF’s Executive Board, the body that approves such loans.
Economists around the world, and even within the IMF’s own internal research unit, are concerned that the organization’s loan conditions will curtail spending too much at a time when developing countries need to be increasing public investments in public health, climate change mitigation and adaptation, and the green energy transition.
What this means is that, while the Biden Administration was selling the biggest increase in domestic public investment in decades, the Treasury Department was taking steps at the IMF to promote policies that would do the opposite—prevent developing countries from increasing their own levels of public investment.
The very same aspects of Friedman’s fiscal restraint that Biden campaigned against are still being implemented each day as the U.S. Treasury instructs its Acting Executive Director at the IMF, Elizabeth Shortino, to approve IMF loans with conditions that are deeply rooted in Friedman’s priorities. As Boston University Professor of Global Development Policy Kevin Gallagher put it, “The U.S. is taking a Keynesian expansionary approach at home, while it has the IMF conditioning loans on doing the opposite in developing countries.”
The United States is the largest shareholder in the IMF, has built-in veto power on the Executive Board, and exercises disproportionate influence over decision making. Biden, however, has not used this power to change the institution’s policies. “Despite its remarkable new policies at home,” Gallagher added, “the administration has not yet squared this approach on the global stage [with its actions taken at the IMF].”
Historically, countries go to the IMF when they are facing financial difficulties, and the IMF’s main goal is to ensure its borrowers maintain their creditworthiness by keeping up their payments to external creditors on time. The main ways the IMF typically does this is by having the country enact policy reforms that reduce its imports and expand its exports, like devaluing its currency, lowering wages, cutting its government budget, and undertaking various structural reforms.
Fiscal austerity is designed to reduce public spending, investment, and employment and slow down GDP growth, which reduces imports and helps to correct trade imbalances. But this strategy is harsh, and can have lingering social, political and economic consequences. Many economists, including the IMF’s own research department, have noted over the years that fiscal austerity can actually do more harm than good—prolonging economic recoveries, undermining future productivity and GDP growth rates, and making it harder for countries to repay their creditors.
In interviews for this article, I asked several academic experts on the IMF and some former IMF and Treasury officials why they think the Biden Administration is promoting Keynesianism at home while still pushing Friedmanomics abroad.
Ilene Grabel, Professor of International Studies at the University of Denver, said, “I’m not sure that there’s an inconsistency here. This dynamic is consistent with the long-standing pattern of ‘do as I say, not as I do.’”
Many economists, including the IMF’s own research department, have noted over the years that fiscal austerity can actually do more harm than good.
James Galbraith, Professor of Government at the University of Texas at Austin, agreed, and added, “The neoliberal austerity doctrines originated in the United States, but they were always marked primarily ‘for export only.’” He noted that previous administrations have attempted to impose fiscal austerity in the United States, but in each case it was short-lived in the face of backlash, and “the survival instincts of American politics have mostly kicked in before the damage was too great.”
“It is interesting that the United States and the European Union—which together can completely determine the actions and approach of the IMF whenever they want [due to their outsized voting power]—have not made calls for the IMF to respond in a more Keynesian countercyclical fashion,” says Jayati Ghosh, Professor of Economics at the University of Massachusetts Amherst, “even though this is exactly what they will do within their own countries during recessions and shocks.” Countercyclical fiscal policy refers to increasing government spending during economic slowdowns and reducing it during periods of higher GDP growth as a way of keeping the economy stabilized over time.
Mark Sobel, a former U.S. Executive Director to the IMF and nearly forty-year Treasury Department official who now serves as the U.S. chairman of the Official Monetary and Financial Institutions Forum, had a different take: “I view the current situation as more of an inevitable reality than an inconsistency.” The United States, he says, has much more capacity to finance its deficits whereas, “Emerging markets and lower income countries simply don't have the same degree of fiscal space and cannot sustain similar debt loads.”
Similarly, James Boughton, a former historian of the IMF from 1992 to 2012 and now a Senior Fellow at the Centre for International Governance Innovation, echoed Sobel’s viewpoint. “It’s not a contradiction. The central issue for IMF lending is that it has to agree with borrowers on a plan to close the financing gap that has erupted, which often means cutting spending or raising taxes.”
Both Sobel and Boughton reflect the Chicago School’s perspective that deficit-reduction is the only way to re-establish the confidence of the private sector and reignite economic growth following an economic crisis or recession. Instead, what usually happens is economic recessions are prolonged, unemployment is worsened, future growth is undermined by public investments never made, and the ability to pay down external debts is undermined.
According to Servaas Storm, a Senior Researcher at Delft University of Technology in the Netherlands, in order for Biden to truly enable developing countries to adopt more expansionary Keynesian policies, an entire interconnected set of IMF policies would need to be overhauled.
For decades, the IMF’s standard macroeconomic framework has insisted that borrowing countries keep inflation and deficits at very low levels at all times; get rid of capital controls to allow the free flow of private capital; deregulate their financial sectors to attract more FDI; finance development through foreign borrowing rather than deficit spending; and make their central banks “independent,” or free from interference by the finance ministry, legislature, or voters.
This set of policy reforms, Storm explains, “have created a type of straight jacket” with the overall net effect being that it is now exceedingly difficult to adopt more expansionary policies. “The IMF and the U.S. Treasury,” he says, “are working on the assumption that Keynesian policies will not work under the current structural conditions faced by most developing countries—which they understand perfectly well because they are the architects of such conditions.” In other words, the current IMF macro framework was designed to prevent Keynesian policies.
How likely is it that Biden will instruct his Treasury Secretary Janet Yellen and Under Secretary Jay Shambaugh to undertake such an overhaul of the IMF’s entire policy framework?
Such major overhauls of IMF macroeconomic policies have happened before. Most notably, during Ronald Reagan’s second presidential term in 1985, Treasury Secretary James Baker led a major policy overhaul at the IMF as part of his international debt-relief initiative, known as the Baker Plan, for resolving the then burgeoning Third World Debt Crisis. Baker, along with his assistant and deputy assistant secretaries, David Mulford and Charles Dallara, saw the debt crisis as an opportunity to advance U.S. objectives by introducing a broader set of free markets policy reforms into future IMF loan conditions.
Borrowing countries that agreed to adopt the reforms were then able to reduce and restructure their external debts under the Brady Plan—established by Baker’s successor, Nicholas Brady, in which the United States and multilateral creditors worked with commercial bank creditors to arrange debt restructurings. The 1985 overhaul suggests that major changes to IMF policies can be adopted when the United States seriously wants to do so.
In order for developing countries to adopt more Keynesian policies, Yellen and Shambaugh would need to call on the IMF to endorse more expansionary fiscal and monetary policies for borrowing countries. This would mean tossing out the IMF’s current playbook and instead allowing borrowers to run higher fiscal deficits to accommodate increased public investment, allow the reestablishment of capital controls, support the reregulation of finance so that states can steer investment capital towards productive activities and developmental priorities, and undo central bank independence.
“Doing this is certainly possible, if the administration wants to do it, and it would of course be eminently desirable,” said Ghosh of the University of Massachusetts Amherst. “But it would likely go against the interests of U.S. big business and finance. Therefore, it would require much greater domestic public pressure to enable progressives within the administration to win such a battle.”
Others are less optimistic. Galbraith of the University of Texas, Austin declared, “I see no reason to think the Biden Administration will challenge IMF practice.” The University of Denver’s Grabel agreed: “There really isn’t any evidence that the Biden Administration has much of an appetite for influencing the basic framework in which the IMF operates. The administration has its eye on the presidential election, and what the IMF does and does not do is sadly irrelevant to the U.S. electorate.”
Storm of Delft University of Technology concurred, “I don’t see it happening. For one thing, the IMF itself is divided over the issue of whether a more Keynesian approach is desirable. For nearly a decade, the IMF leadership has continued to openly disregard the findings of its own research department.” Storm agreed with Grabel, “Ultimately, the Biden administration cannot—and will not—influence the IMF to adopt a more Keynesian stance. Financial sector interests in today's financialized global economy will not allow it. Debts have to be repaid, period.” Storm also pointed to the multifaceted nature of the policy overhaul that would be required. He concluded, “A Keynesian strategy can only work in a developing-country context if the country has capital controls in place to safeguard its domestic policy space but global finance does not favor capital controls. And because the Biden Administration is so heavily influenced by the US financial sector, it is not likely to push for a more Keynesian approach to macro policy in developing economies.”
There’s evidence to suggest that Galbraith, Grable, and Storm may be correct. At the IMF and World Bank annual meetings happening in Marrakech, Morocco in October, the U.S. called for modernization reforms at the World Bank and the multilateral development bank (MDB) system. But, notably, modernization reforms for the IMF were not on the agenda in Marrakech. Asked if the Treasury Department had any plans to change macroeconomic policies at the IMF to make them more in line with Biden’s domestic policies, Senior Spokesperson for International Affairs Megan Apper confirmed, “There is no change in our policy.”