Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
Keep CounterPunch ad free. Support our annual fund drive today!

Financial Institutions Admit Austerity Failed


The first part of 2013 has been something of a confessional period for the economic managerial class. The IMF’s chief economist, Olivier Blanchard, conceded that “forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation.” (‘Fiscal consolidation’ is a polite way of saying ‘austerity’.) U.S. Treasury Secretary Jack Lew admitted that “there has to be a focus on what the impact on unemployment is” of austerity policies; also, that “you cannot be in the world where austerity just leads to more austerity”; and finally, that “the rush to do all the [austerity] front-end has actually made the problem harder in some countries.” He even suggested that “Europeans need to look as well what they can do to generate more demand in their economy.”

Managing Director of the IMF, Christine Lagarde, confessed that “we don’t see the need to do upfront, heavy duty fiscal consolidation as was initially planned”; and “the best way to create jobs is through growth.” EU Economic and Monetary Affairs Commissioner Olli Rehn said that the IMF and the US’ recent calls for less austerity “are preaching to the converted.”

Meanwhile, Carmen Reinhart and Kenneth Rogoff, the Harvard economists responsible for one of the more influential studies used to defend austerity, have admitted that “austerity is not the only answer to a debt problem.” This came after three economists at the University of Massachusetts accused them of “selective exclusion” of data. Reinhart and Rogoff have since admitted that their critics “correctly identified a spreadsheet coding error.” In my view, their most striking error is being ignored: the failure to recognize that austerity didn’t work during the Great Depression and won’t work now, during the Great Recession. Anyone can make a spreadsheet error. It takes a Harvard professor to forget basic history.

It’s not particularly interesting when doctrinal managers like Reinhart and Rogoff change positions. The ability to turn on one’s heel and switch from one ideological conviction to its opposite, like a schoolchild running the pacer test, is probably the ideological manager’s main duty. The ones who collapse from exhaustion are weeded out long before they become IMF chiefs. What’s more interesting is why the coach is having them run in the opposite direction now.

In a correspondence I had with economist Jack Rasmus, he explained the economic managerial class’ reversal:

First, it may signal a future shift to business-investor tax cuts as a preferred ‘stimulus’ (which doesn’t work either). However, since tax cuts will raise the deficit, they have to justify an increase in the deficit if they’re going to move ahead with the tax cuts. Thus, the attack on ‘austerity’ (stimulus in reverse) as not as productive as they thought is first necessary. On the other hand, it’s important to note that the shift to ‘stimulus’ doesn’t mean a shift from social spending cuts; it means a shift to more deficit via corporate tax cuts.

Second, the abandonment of austerity may represent a prelude to a still greater reliance on monetary policy. Let the central bank bear all the burden (and blame) and take the heat off politicians more visibly responsible for spending cut austerity. Monetary policy (i.e. increasing liquidity to banks, investors and businesses) has in turn two prime goals. One: to boost the stock and financial securities markets and ensure more profits for speculators, and, second, to lower their currency’s exchange value to allow competition with other currency centers…A sure sign that capitalist policymakers are getting more desperate and trying to grow  by beggaring their competitors.  It’s competitive devaluations—not by fiat as in the 1930s—but  by liquidity-exchange rate manipulation.

Whatever the case may be, the financial institutions’ current ideological inflection should probably be regarded with suspicion. It is much too sharp an inflection to indicate any sort of honest change in thinking.

The solutions that the economic managers are advocating demonstrate a useful point. They simultaneously demand stimulus and deficit reduction. As Treasury Secretary Jack Lew put it, “We shouldn’t choose between growth and job creation and getting our fiscal house in order.” This is like a child wishing he could stay up all night and get a good night’s sleep: either choice negates the other. These mental exercises in self-contradiction further illustrate the way in which the elite must accept mutually conflicting views. Orwell called this ‘doublethink.’

Today we call it things like ‘nuance.’ Example: Reinhart and Rogoff said that “the recent debate about the global economy has taken a distressingly simplistic turn,” by which they mean austerity is finally being firmly rejected. In elite circles, ‘simplistic’ explanations are any which involve elementary truths: that authentic stimulus increases the deficit, as do corporate tax cuts; that privatization makes things unaccountable to the public; that a middle and under-class recovery requires an upper-class tax. (These simple facts are incomprehensible to the elite because they suggest a world in which extreme wealth causes injustice rather than eradicates it.) Derivatives and credit default swaps, on the other hand, are ‘nuanced’ tools which anyone without an advanced degree in finance shouldn’t comment on.

An outgrowth of this tendency toward ‘nuance’ is the peculiarly mystical tone that the economics profession has taken on. For example, the view that the business cycle will inevitably restore us to prosperity, and that the present downturn is just some sort of random misfortune. I recall a friend in university remarking that he planned to enter a PhD program in hopes of “waiting out the recession,” as though it were a spell of rain or some other act of god. The market giveth and taketh away. To suggest any sort of human agency behind these downturns—namely, a relationship between the wealth and poverty—is to commit the dreaded error of viewing economics as a zero-sum game. This of course is a fallacy, because economics is a magical process by which the concentrated wealth simultaneously diffuses its wealth (i.e. trickle-down theory).

Ken Klippenstein lives in Madison, Wisconsin, where he edits the left issues website He can be reached at

Ken Klippenstein is an American journalist who can be reached on Twitter @kenklippenstein or by email:

More articles by:

2016 Fund Drive
Smart. Fierce. Uncompromised. Support CounterPunch Now!

  • cp-store
  • donate paypal

CounterPunch Magazine


October 26, 2016
John W. Whitehead
A Deep State of Mind: America’s Shadow Government and Its Silent Coup
Eric Draitser
Dear Liberals: Trump is Right
Anthony Tarrant
On the Unbearable Lightness of Whiteness
Mark Weisbrot
The Most Dangerous Place in the World: US Pours in Money, as Blood Flows in Honduras
Chris Welzenbach
The Establishment and the Chattering Hack: a Response to Nicholas Lemann
Luke O'Brien
The Churchill Thing: Some Big Words About Trump and Some Other Chap
Sabia Rigby
In the “Jungle:” Report from the Refugee Camp in Calais, France
Linn Washington Jr.
Pot Decriminalization Yields $9-million in Savings for Philadelphia
Pepe Escobar
“America has lost” in the Philippines
Pauline Murphy
Political Feminism: the Legacy of Victoria Woodhull
Lizzie Maldonado
The Burdens of World War III
David Swanson
Slavery Was Abolished
Thomas Mountain
Preventing Cultural Genocide with the Mother Tongue Policy in Eritrea
Colin Todhunter
Agrochemicals And The Cesspool Of Corruption: Dr. Mason Writes To The US EPA
October 25, 2016
David Swanson
Halloween Is Coming, Vladimir Putin Isn’t
Hiroyuki Hamada
Fear Laundering: an Elaborate Psychological Diversion and Bid for Power
Priti Gulati Cox
President Obama: Before the Empire Falls, Free Leonard Peltier and Mumia Abu-Jamal
Kathy Deacon
Plus ça Change: Regime Change 1917-1920
Robin Goodman
Appetite for Destruction: America’s War Against Itself
Richard Moser
On Power, Privilege, and Passage: a Letter to My Nephew
Rev. William Alberts
The Epicenter of the Moral Universe is Our Common Humanity, Not Religion
Dan Bacher
Inspector General says Reclamation Wasted $32.2 Million on Klamath irrigators
David Mattson
A Recipe for Killing: the “Trust Us” Argument of State Grizzly Bear Managers
Derek Royden
The Tragedy in Yemen
Ralph Nader
Breaking Through Power: It’s Easier Than We Think
Norman Pollack
Centrist Fascism: Lurching Forward
Guillermo R. Gil
Cell to Cell Communication: On How to Become Governor of Puerto Rico
Mateo Pimentel
You, Me, and the Trolley Make Three
Cathy Breen
“Today Is One of the Heaviest Days of My Life”
October 24, 2016
John Steppling
The Unwoke: Sleepwalking into the Nightmare
Oscar Ortega
Clinton’s Troubling Silence on the Dakota Access Pipeline
Patrick Cockburn
Aleppo vs. Mosul: Media Biases
John Grant
Humanizing Our Militarized Border
Franklin Lamb
US-led Sanctions Targeting Syria Risk Adjudication as War Crimes
Paul Bentley
There Must Be Some Way Out of Here: the Silence of Dylan
Norman Pollack
Militarism: The Elephant in the Room
Patrick Bosold
Dakota Access Oil Pipeline: Invite CEO to Lunch, Go to Jail
Paul Craig Roberts
Was Russia’s Hesitation in Syria a Strategic Mistake?
David Swanson
Of All the Opinions I’ve Heard on Syria
Weekend Edition
October 21, 2016
Friday - Sunday
John Wight
Hillary Clinton and the Brutal Murder of Gaddafi
Diana Johnstone
Hillary Clinton’s Strategic Ambition in a Nutshell
Jeffrey St. Clair
Roaming Charges: Trump’s Naked and Hillary’s Dead
John W. Whitehead
American Psycho: Sex, Lies and Politics Add Up to a Terrifying Election Season
Stephen Cooper
Hell on Earth in Alabama: Inside Holman Prison
Patrick Cockburn
13 Years of War: Mosul’s Frightening and Uncertain Future