FacebookTwitterGoogle+RedditEmail

The Errors of Austerity

by BINOY KAMPMARK

They were created and feted to make witchdoctors respectable.  The harm and extent that economists can produce, while still not quite in the vicinity of those of doctors, can be extensive.  Errors are tolerated, fictions propagated.  Dangerous doctrines become impenetrable and the mainstay of governments.

It was therefore interesting that the IMF’s chief economist Olivier Blanchard, along with his colleague Daniel Leigh, made a confession in a recent paper that, “Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation”.  Last October, they were already busy at work seeking to pull the carpet from under the very organisation they are employed by, taking issue with the orthodox school of austerity.  The calculations upon which the austerity measures were then inflicted upon such countries as Greece were deemed inaccurate.

Both Blanchard and Leigh received criticism for their stance, necessitating, in their view, a “revisiting” of their approach and results.  Their views were, however, affirmed by the likes of Victoria Chick and Ann Pettifor, who had argued in PRIME, and outlet examining policy research in macroeconomics, that “Fiscal consolidation does not ‘slash’ the debt, but contributes to it.”  Writing on January 6 in Prime, Pettifor noted that a body staffed by 1100 professional economists with an overall budget of $800 million “failed to make that correct call.”

The IMF paper “Growth Forecast Errors and Fiscal Multipliers” (Jan 2013) has been the Blanchard-Leigh riposte, a new year’s gift fellow economists did not want to receive. The authors are cautious not to bite the hand that feeds them, standard protocol in making sure employees ignore the egg on the face of their employers.  “This working paper should not be reported as representing the views of the IMF… Working papers describe research in progress by the author(s) and are published to elicit comments and to further debate.”

Cold comfort then to know that such “research” is divorced from policy, and that the IMF’s stance on that position may not be at one with the researchers.  While it is true that the current IMF is not the same organisation that breathed fire at the very mention of relaxing austerity in the 1990s, scant comfort can be found in the current outfit.  Blanchard’s position, however, has been deemed “dovish” and formidable (Businessweek, Oct 9, 2012).

The thrust of the paper is that “fiscal multipliers were substantially higher than implicitly assumed by forecasters.”  This was due to the fact that the fiscal consolidation that had taken place in advanced economies “has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis.”

Why have these “multipliers” increased?  The authors speculate on several grounds – interest rate policies and the nature of consumption, to name but two.  These again point to the flawed models embraced by the voodoo forecasters.  For every 1 percentage point of GDP gained in the fiscal consolidation forecast for 2010-11, a loss of 1 percentage point of real GDP occurred.  “A natural interpretation of this finding is that multipliers implicit in the forecasts were, on average, too low by about 1.”

It is now assumed that Greece is in a category where, to use the standard jargon, fiscal multipliers are large, and their effects considerably greater than the financial boffins were aware of.  (Such errors were similarly perpetrated upon the economies of Portugal, Italy, Spain and Ireland.)  Cuts in spending can increase ratios of debt to gross domestic product in severe fashion.

To put it in simple terms, pruning the tree too severely will see less growth.  Extreme tax hikes and cuts in expenditure can off-set the gains made in any fiscal consolidation.  The result is a stunted creature.  Such outcomes seem entirely logical, though logic tends to be extra-terrestrial to much economic forecasting.

Since 2010, more than 68,000 Greek businesses have closed, a numbing state of affairs for any minister of finance to contemplate.  The Prime Minister Antonis Samaras, heading a precarious coalition, is set to impose a further $17.45 billion in spending cuts and tax hikes. Given that the Greek economy is in its sixth year, the tree of economic growth is set for another round of inane savaging.

Financial order is certainly desirable and there is little doubt that Europe’s financial system is debilitated.  But financial madness, affected through the current austerity regime, is not.  When senior IMF employees working on key economic standpoints start taking of the different root of reason, re-assessments are in order.  It remains to be seen whether the Blanchard prescription will take hold at all.

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge.  He lectures at RMIT University, Melbourne.  Email: bkampmark@gmail.com

 

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He lectures at RMIT University, Melbourne. Email: bkampmark@gmail.com

More articles by:
May 24, 2016
Sharmini Peries - Michael Hudson
The Financial Invasion of Greece
Jonathan Cook
Religious Zealots Ready for Takeover of Israeli Army
Ted Rall
Why I Am #NeverHillary
Mari Jo Buhle – Paul Buhle
Television Meets History
Robert Hunziker
Troika Heat-Seeking Missile Destroys Greece
Judy Gumbo
May Day Road Trip: 1968 – 20016
Colin Todhunter
Cheerleader for US Aggression, Pushing the World to the Nuclear Brink
Jeremy Brecher
This is What Insurgency Looks Like
Jonathan Latham
Unsafe at Any Dose: Chemical Safety Failures from DDT to Glyphosate to BPA
Binoy Kampmark
Suing Russia: Litigating over MH17
Dave Lindorff
Europe, the US and the Politics of Pissing and Being Pissed
Matt Peppe
Cashing In at the Race Track While Facing Charges of “Abusive” Lending Practices
Gilbert Mercier
If Bernie Sanders Is Real, He Will Run as an Independent
Peter Bohmer
A Year Later! The Struggle for Justice Continues!
Dave Welsh
Police Chief Fired in Victory for the Frisco 500
May 23, 2016
Conn Hallinan
European Union: a House Divided
Paul Buhle
Labor’s Sell-Out and the Sanders Campaign
Uri Avnery
Israeli Weimar: It Can Happen Here
John Stauber
Why Bernie was Busted From the Beginning
James Bovard
Obama’s Biggest Corruption Charade
Joseph Mangano – Janette D. Sherman
Indian Point Nuclear Plant: It Doesn’t Take a Meltdown to Harm Local Residents
Desiree Hellegers
“Energy Without Injury”: From Redwood Summer to Break Free via Occupy Wall Street
Lawrence Davidson
The Unraveling of Zionism?
Patrick Cockburn
Why Visa Waivers are Dangerous for Turks
Robert Koehler
Rethinking Criminal Justice
Lawrence Wittner
The Return of Democratic Socialism
Ha-Joon Chang
What Britain Forgot: Making Things Matters
John V. Walsh
Only Donald Trump Raises Five “Fundamental and Urgent” Foreign Policy Questions: Stephen F. Cohen Bemoans MSM’s Dismissal of Trump’s Queries
Andrew Stewart
The Occupation of the American Mind: a Film That Palestinians Deserve
Nyla Ali Khan
The Vulnerable Repositories of Honor in Kashmir
Weekend Edition
May 20, 2016
Friday - Sunday
Rob Urie
Hillary Clinton and Political Violence
Andrew Levine
Why Not Hillary?
Paul Street
Hillary Clinton’s Neocon Resumé
Chris Floyd
Twilight of the Grifter: Bill Clinton’s Fading Powers
Eric Mann
How We Got the Tanks and M-16s Out of LA Schools
Jason Hirthler
The West’s Needless Aggression
Dan Arel
Why Hillary Clinton’s Camp Should Be Scared
Robert Hunziker
Fukushima Flunks Decontamination
David Rosen
The Privatization of the Public Sphere
Margaret Kimberley
Obama’s Civil Rights Hypocrisy
Chris Gilbert
Corruption in Latin American Governments
Pete Dolack
We Can Dream, or We Can Organize
Dan Kovalik
Colombia: the Displaced & Invisible Nation
Jeffrey St. Clair
Fat Man Earrings: a Nuclear Parable
Medea Benjamin
Israel and Saudi Arabia: Strange Bedfellows in the New Middle East
FacebookTwitterGoogle+RedditEmail