Never mind! IMF now says austerity mistakes don’t matter

It did seem too good to be true. The International Monetary Fund last week issued its second paper in three months acknowledging that the damaging effects of austerity measures on economies is much stronger than previously assumed. Unlike October’s quiet admission of error, however, this time IMF researchers say colossal miscalculations don’t matter.

Perhaps the IMF is taking back the bureaucratically couched, quiet mea culpa it genteelly issued last October? Being an orthodox economist evidently means never having to say you are sorry. It does mean that if reality doesn’t match the theory, then it is reality that must be changed.

Readers may recall that in October 2012 the IMF slipped into its World Economic Outlook, in which it forecast that the global economic growth rate would continue to decline, this interesting line:

“Public spending cutbacks and the still-weak financial system [are] weighing on prospects.”

That is as close to an admission as we are likely to receive from the IMF, the World Bank or other financial institutions that the austerity that they relentlessly impose weakens economies. Perhaps some at the IMF are getting cold feet at such an admission, or, more likely, such ideologically inconvenient pronouncements received more attention than expected given the tepid language buried in an otherwise routine paper.

Thus we have last week’s interesting development, in which two IMF researchers published a further study on the IMF web site that confirmed the catastrophic mis-calculations in applying austerity, but concluded that the mistakes don’t matter and austerity must be imposed anyway. As a hedge, the paper’s front page declares it is not an official IMF document and does not necessarily represent the viewpoints of the IMF.

The IMF did see fit to publish the paper and one of the authors is its director of research, so let’s nonetheless take it seriously. As seriously as an ideological paper can be taken, even if its pre-selected conclusion is masked by jargon and mathematical formulae, and clearly intended for an audience of professional economists. There is no reason for us not to peer over their shoulders, especially as austerity has very real implications for us.

Swing an axe, get bloodletting

This debate over austerity revolves around assumptions as to the effect of spending cuts. As I wrote in my October 10 post on the IMF’s quiet confession:

“[I]t seems that governments applying austerity programs over-estimated the savings to be accrued from them. The IMF said a common figure used by governments was to assume that for each dollar lost in government spending, 50 cents is erased from gross domestic product, an assumption used when creating austerity budgets. But, the fund said, its study of the issue has found that, since the economic collapse that began in 2008, for each dollar cut from government spending, GDP is reduced from 90 cents to $1.70. In other words, the result of austerity is that it has accelerated economic contraction.”

A simple look around us confirms that finding. Stagnation or renewed economic contraction is the continuing result in the world’s advanced capitalist countries. Eurozone unemployment, for example, has risen to 11.8 percent.

Sidestepping any examination of ideological bias — not surprisingly, since that would implicate the IMF itself not to mention the entire universe of orthodox economists — authors Olivier Blanchard and Daniel Leigh refer only to “growth forecast errors” and offer a series of ideas as to the source of these innocent errors. The authors’ calculations found nearly identical errors as those mentioned two paragraphs above in calculating the effects of imposed austerity since the onset of the global economic crisis in 2008. From that, they write:

“In other words … growth disappointments should be larger in economies that planned greater fiscal cutbacks. This is what we found.” [page 3]

These “disappointments” were significant — the authors said the extra loss, beyond economists’ calculations, was nearly one percent of economic output for each one percent cut in spending, a result they found consistently in the more than two dozen countries they analyzed. Similarly bad forecasts were made by the European Commission, the Organisation for Economic Co-operation and Development and the IMF. Nonetheless, the authors conclude:

“[O]ur findings that short-term fiscal multipliers have been larger than expected do not have mechanical implications for the conduct of fiscal policy. Some commentators interpreted our earlier box as implying that fiscal consolidation should be avoided altogether. This does not follow from our analysis.” [page 6]

Finding a tree instead of a forest

Among the reasons offered for the “errors” in calculating the net effects of austerity programs are that zero interest rates can’t be cut further; that consumption is more dependent on current income than future income due to the tightening of credit; and the effect of cuts become amplified when “there is a great deal of slack in the economy.” The last of those three lead the IMF researchers to conclude that the “errors” in calculating economic effects only apply from the onset of the 2008 collapse; before that everything was fine.

Unless you lived in a developing country in which IMF-imposed austerity was applied. The authors likely do not. But, for now, they acknowledge that the “errors” in the effect of spending cuts for 2008 and beyond resulted in forecasters consistently under-estimating the rise in unemployment and the decline in demand. In the fifth year of economic crisis, the IMF researchers wrote:

“[W]e find that planned fiscal consolidation is associated with significantly lower-than-expected consumption and investment growth. … [I]nvestment varies relatively strongly in response to overall economic conditions.” [page 18]

Um, well, yes. When wages decline and unemployment rises, demand is reduced and corporations would rather sit on their cash, buy back their stock or speculate. Why should they invest when they have trouble selling what they already produce? In advanced capitalist countries, consumer spending accounts for 60 to 70 percent of the economy and if working people don’t have the money, they aren’t going to spend it if they are also trying to reduce their debt. Debt accumulated because that was the only way they could maintain living standards when wages have stagnated or declined since the 1970s.

The competitive pressures on corporations to increase their profits leads them to move production to the places with the lowest wages; that buoys profits for a time but the resulting fall in wages and rise in unemployment in the places where production is shuttered means weaker demand. Weaker demand results in increased pressure on profits, and round and round we go. Austerity, at bottom, is governments enforcing the demands of the most powerful industrialists and financiers for ever more profits.

Competitive pressures force corporations to act in such a manner, and the immense capital accumulated by the biggest capitalists grants them decisive power, ensuring that their interests become paramount when governments implement policy. The International Monetary Fund and World Bank are multi-national instruments of the most powerful capitalist governments, which in turn reflect the aggregate interests of their most powerful industrialists and financiers. If we keep that in mind, we need not fall off our chairs when an IMF paper, having laid out the damage done by austerity programs, nonetheless concludes:

“[O]our results should not be construed as arguing for any specific fiscal policy stance in any specific country. In particular, the results do not imply that fiscal consolidation is undesirable. Virtually all advanced economies face the challenge of fiscal adjustment in response to elevated government debt levels and future pressures on public finances from demographic change.” [page 20]

Thus the dramatic conclusion: The economic decline resulting from austerity has been badly under-estimated; therefore we must have more austerity. Ideology this may be, but it’s an ideology concocted to continue capitalist business as usual — it’s not an ideology that inexplicably drops from the sky. The dismal “science” indeed.

4 comments on “Never mind! IMF now says austerity mistakes don’t matter

  1. 2001tpc says:

    Europe’s economies struggled under 25 years (1945-1971) of Bretton Woods. Literally, there was no money–Europe’s efforts at rebuilding after the war were stymied by diabolical treaty that limited how much money could be issued, and how much could be exchanged with other currencies. In an expanding economy, this is deadly. It was a time when banks couldn’t lend (they had little cash on hand), Educated, hardworking people lived in poverty, cars were unaffordable and gasoline was scarce. Here they go again. Doesn’t anyone remember?

    • I’m not sure what your point is — nobody serious proposes going back to the gold standard, and today’s financialized capitalist system, with its massive forex profits, is far beyond the point of being able to return to it. Moreover, the quarter-century following World War II was a period of extraordinary growth in Europe — the region enjoyed some of the highest growth rates it ever experienced and investment was also high. As to shortages in 1945 or so, I should think the massive destruction of World War II might have something to do with that.

      If your point is that the eurozone in essence “locks in” “exchange” rates — one country’s euro is the same as the euro in the next country — fair enough, but even under Bretton Woods, countries could devalue their currencies to correct trade imbalances. Countries using the euro can’t do that, but with a single currency under neoliberal domination, we have an entirely different problem. The “golden era” of post-World War II Keynesianism was a product of those times and can’t be replicated, but can hardly be accused of imposing poverty.

      • 2001tpc says:

        I was pointing to the main effect of Bretton Woods: recovery after WW2 was very, very slow due to the central banking system’s long-term self-imposed shortage of lendable cash. Same thing is happening right now. Different cause, but same effect–they worried too much about inflation during a recovery phase, and wound up with a sluggish recovery. Why are banks doing this? In my opinon there are three big reasons: 1) risk aversion (a self-fulfilling negative prophecy); 2) they’re in denial regarding their conduct in the 2000s where inflation rate targeting substantially contributed to the real estate asset bubble; 3) finance is a vertically integrated business, and providing financial services to distressed customers is far more lucrative than providing services to wealthy ones.

        • The world’s central banks, particularly the European Central Bank and the Bundesbank, undoubtedly remain in the thrall of Chicago School/monetarist ideology, with its perpetual panic over the supposed threat of inflation. As I noted in the main post, that ideology expresses the interests of industrial and financial elites; how much they truly fear inflation and how much is a convenient storyline to give a gloss over policies they wish to impose anyway is an open question.

          I have no issue with reasons one and two but those are more effects than causes. As to reason three, providing financial services to distressed customers is surely lucrative, but the financial industry is adept at squeezing profits out of everybody, wealthy ones included. With demand so sluggish, there isn’t much reason to invest even with low interest rates. It’s more profitable to speculate.

          Incidentally, a bit of research reveals that the Western European growth rate for the period 1950-1973 was 4.06% per year (GDP per capita) while the U.S. growth rate for the period 1950-1973 was 2.45% per year (GDP per capita). Source: Aggregate Growth, 1950-2005, Nicholas Crafts and Gianni Toniolo, citing the Groningen Growth and Development Centre Total Economy Database (2007), and Angus Maddison, The World Economy: Historical Statistics (2003). Maddison’s work is as solid as it gets for historical statistical research.

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