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

Like What You’ve Read? Support CounterPunch
September 01, 2015
Mike Whitney
Return to Crisis: Things Keep Getting Worse
Michael Schwalbe
The Moral Hazards of Capitalism
Eric Mann
Inside the Civil Rights Movement: a Conversation With Julian Bond
Pam Martens
How Wall Street Parasites Have Devoured Their Hosts, Your Retirement Plan and the U.S. Economy
Jonathan Latham
Growing Doubt: a Scientist’s Experience of GMOs
Fran Shor
Occupy Wall Street and the Sanders Campaign: a Case of Historical Amnesia?
Joe Paff
The Big Trees: Cockburn, Marx and Shostakovich
Randy Blazak
University Administrators Allow Fraternities to Turn Colleges Into Rape Factories
Robert Hunziker
The IPCC Caught in a Pressure Cooker
Robert Koehler
Sending Your Children Off to Safe Spaces in College
Jesse Jackson
Season of the Insurgents: From Trump to Sanders
August 31, 2015
Michael Hudson
Whitewashing the IMF’s Destructive Role in Greece
Conn Hallinan
Europe’s New Barbarians
Lawrence Ware
George Bush (Still) Doesn’t Care About Black People
Joseph Natoli
Plutocracy, Gentrification and Racial Violence
Franklin Spinney
One Presidential Debate You Won’t Hear: Why It is Time to Adopt a Sensible Grand Strategy
Dave Lindorff
What’s Wrong with Police in America
Louis Proyect
Jacobin and “The War on Syria”
Lawrence Wittner
Militarism Run Amok: How Russians and Americans are Preparing Their Children for War
Binoy Kampmark
Tales of Darkness: Europe’s Refugee Woes
Ralph Nader
Lo, the Poor Enlightened Billionaire!
Peter Koenig
Greece: a New Beginning? A New Hope?
Dean Baker
America Needs an “Idiot-Proof” Retirement System
Vijay Prashad
Why the Iran Deal is Essential
Tom Clifford
The Marco Polo Bridge Incident: a History That Continues to Resonate
Peter Belmont
The Salaita Affair: a Scandal That Never Should Have Happened
Weekend Edition
August 28-30, 2015
Randy Blazak
Donald Trump is the New Face of White Supremacy
Jeffrey St. Clair
Long Time Coming, Long Time Gone
Mike Whitney
Looting Made Easy: the $2 Trillion Buyback Binge
Alan Nasser
The Myth of the Middle Class: Have Most Americans Always Been Poor?
Rob Urie
Wall Street and the Cycle of Crises
Andrew Levine
Viva Trump?
Ismael Hossein-Zadeh
Behind the Congressional Disagreements Over the Iran Nuclear Deal
Lawrence Ware – Marcus T. McCullough
I Won’t Say Amen: Three Black Christian Clichés That Must Go
Evan Jones
Zionism in Britain: a Neglected Chronicle
John Wight
Learning About the Migration Crisis From Ancient Rome
Andre Vltchek
Lebanon – What if it Fell?
Charles Pierson
How the US and the WTO Crushed India’s Subsidies for Solar Energy
Robert Fantina
Hillary Clinton, Palestine and the Long View
Ben Burgis
Gore Vidal Was Right: What Best of Enemies Leaves Out
Suzanne Gordon
How Vets May Suffer From McCain’s Latest Captivity
Robert Sandels - Nelson P. Valdés
The Cuban Adjustment Act: the Other Immigration Mess
Uri Avnery
The Molten Three: Israel’s Aborted Strike on Iran
John Stanton
Israel’s JINSA Earns Return on Investment: 190 Americans Admirals and Generals Oppose Iran Deal
Bill Yousman
The Fire This Time: Ta-Nehisi Coates’s “Between the World and Me”