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

 

More articles by:

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

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

June 27, 2017
Jim Kavanagh
California Scheming: Democrats Betray Single-Payer Again
Jonathan Cook
Hersh’s New Syria Revelations Buried From View
Edward Hunt
Excessive and Avoidable Harm in Yemen
Howard Lisnoff
The Death of Democracy Both Here and Abroad and All Those Colorful Sneakers
Gary Leupp
Immanuel Kant on Electoral Interference
Kenneth Surin
Theresa May and the Tories are in Freefall
Slavoj Zizek
Get the Left
Robert Fisk
Saudi Arabia Wants to Reduce Qatar to a Vassal State
Ralph Nader
Driverless Cars: Hype, Hubris and Distractions
Rima Najjar
Palestinians Are Seeking Justice in Jerusalem – Not an Abusive Life-Long Mate
Norman Solomon
Is ‘Russiagate’ Collapsing as a Political Strategy?
Binoy Kampmark
In the Twitter Building: Tech Incubators and Altering Perceptions
Dean Baker
Uber’s Repudiation is the Moment for the U.S. to Finally Start Regulating the So-called Sharing Economy
Rob Seimetz
What I Saw From The Law
George Wuerthner
The Causes of Forest Fires: Climate vs. Logging
June 26, 2017
William Hawes – Jason Holland
Lies That Capitalists Tell Us
Chairman Brandon Sazue
Out of the Shadow of Custer: Zinke Proves He’s No “Champion” of Indian Country With his Grizzly Lies
Patrick Cockburn
Grenfell Tower: the Tragic Price of the Rolled-Back Stat
Joseph Mangano
Tritium: Toxic Tip of the Nuclear Iceberg
Ray McGovern
Hersh’s Big Scoop: Bad Intel Behind Trump’s Syria Attack
Roy Eidelson
Heart of Darkness: Observations on a Torture Notebook
Geoff Beckman
Why Democrats Lose: the Case of Jon Ossoff
Matthew Stevenson
Travels Around Trump’s America
David Macaray
Law Enforcement’s Dirty Little Secret
Colin Todhunter
Future Shock: Imagining India
Yoav Litvin
Animals at the Roger Waters Concert
Binoy Kampmark
Pride in San Francisco
Stansfield Smith
North Koreans in South Korea Face Imprisonment for Wanting to Return Home
Hamid Yazdan Panah
Remembering Native American Civil Rights Pioneer, Lehman Brightman
James Porteous
Seventeen-Year-Old Nabra Hassanen Was Murdered
Weekend Edition
June 23, 2017
Friday - Sunday
Jeffrey St. Clair
Democrats in the Dead Zone
Gary Leupp
Trump, Qatar and the Danger of Total Confusion
Andrew Levine
The “Democracies” We Deserve
Jeffrey St. Clair - Joshua Frank
The FBI’s “Operation Backfire” and the Case of Briana Waters
Rob Urie
Cannibal Corpse
Joseph G. Ramsey
Savage Calculations: On the Exoneration of Philando Castile’s Killer
John Wight
Trump’s Attack on Cuba
Dave Lindorff
We Need a Mass Movement to Demand Radical Progressive Change
Brian Cloughley
Moving Closer to Doom
David Rosen
The Sex Offender: the 21st Century Witch
John Feffer
All Signs Point to Trump’s Coming War With Iran
Jennifer L. Lieberman
What’s Really New About the Gig Economy?
Pete Dolack
Analyzing the Failures of Syriza
Vijay Prashad
The Russian Nexus
Mike Whitney
Putin Tries to Avoid a Wider War With the US
FacebookTwitterGoogle+RedditEmail