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

Weekend Edition
November 17, 2017
Friday - Sunday
Paul Street
Thank an Anti-War Veteran
Andrew Levine
What’s Wrong With Bible Thumpers Nowadays?
Jeffrey St. Clair - Alexander Cockburn
The CIA’s House of Horrors: the Abominable Dr. Gottlieb
Wendy Wolfson – Ken Levy
Why We Need to Take Animal Cruelty Much More Seriously
Mike Whitney
Brennan and Clapper: Elder Statesmen or Serial Fabricators?
David Rosen
Of Sex Abusers and Sex Offenders
Ryan LaMothe
A Christian Nation?
Dave Lindorff
Trump’s Finger on the Button: Why No President Should Have the Authority to Launch Nuclear Weapons
W. T. Whitney
A Bizarre US Pretext for Military Intrusion in South America
Deepak Tripathi
Sex, Lies and Incompetence: Britain’s Ruling Establishment in Crisis 
Howard Lisnoff
Who You’re Likely to Meet (and Not Meet) on a College Campus Today
Roy Morrison
Trump’s Excellent Asian Adventure
John W. Whitehead
Financial Tyranny
Ted Rall
How Society Makes Victimhood a No-Win Proposition
Jim Goodman
Stop Pretending the Estate Tax has Anything to do With Family Farmers
Thomas Klikauer
The Populism of Germany’s New Nazis
Murray Dobbin
Is Trudeau Ready for a Middle East war?
Jeiddy Martínez Armas
Firearm Democracy
Jill Richardson
Washington’s War on Poor Grad Students
Ralph Nader
The Rule of Power Over the Rule of Law
Justin O'Hagan
Capitalism Equals Peace?
Matthew Stevenson
Into Africa: From the Red Sea to Nairobi
Geoff Dutton
The Company We Sadly Keep
Evan Jones
The Censorship of Jacques Sapir, French Dissident
Linn Washington Jr.
Meek Moment Triggers Demands for Justice Reform
Gerry Brown
TPP, Indo Pacific, QUAD: What’s Next to Contain China’s Rise?
Robert Fisk
The Exile of Saad Hariri
Romana Rubeo - Ramzy Baroud
Anti-BDS Laws and Pro-Israeli Parliament: Zionist Hasbara is Winning in Italy
Robert J. Burrowes
Why are Police in the USA so Terrified?
Chuck Collins
Stop Talking About ‘Winners and Losers’ From Corporate Tax Cuts
Ron Jacobs
Private Property Does Not Equal Freedom
Kollibri terre Sonnenblume
Mass Shootings, Male Toxicity and their Roots in Agriculture
Binoy Kampmark
The Fordist Academic
Frank Scott
Weapons of Mass Distraction Get More Destructive
Missy Comley Beattie
Big Dick Diplomacy
Michael Doliner
Democracy, Real Life Acting and the Movies
Dan Bacher
Jerry Brown tells indigenous protesters in Bonn, ‘Let’s put you in the ground’
Winslow Myers
The Madness of Deterrence
Cesar Chelala
A Kiss is Not a Kiss: Sexual Abuse and Exploitation of Children
Jimmy Centeno
Garcia Meets Guayasamin: A De-Colonial Experience
Stephen Martin
When Boot Becomes Bot: Surplus Population and The Human Face.
Martin Billheimer
Homer’s Iliad, la primera nota roja
Louis Proyect
Once There Were Strong Men
Charles R. Larson
Review: Mike McCormack’s Solar Bones
David Yearsley
Academics Take Flight
FacebookTwitterGoogle+RedditEmail