FMI tropeca nos multiplicadores fiscais, admite economista chefe -Washington Post

An amazing mea culpa from the IMF’s chief economist on austerity
Posted by Howard Schneider
Wonkblog of the Washington Post on January 3, 2013 at 12:17 pm
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/03/an-amazing-mea-culpa-from-the-imfs-chief-economist-on-austerity/?tid=pm_business_pop

Consider it a mea culpa submerged in a deep pool of calculus and regression analysis: The International Monetary Fund’s top economist today acknowledged that the fund blew its forecasts for Greece and other European economies because it did not fully understand how government austerity efforts would undermine economic growth.
The new and highly technical paper looks again at the issue of fiscal multipliers – the impact that a rise or fall in government spending or tax collection has on a country’s economic output.

IMF chief economist Olivier Blanchard writes that the fund misjudged the impact of austerity on European economies.

That it comes under the byline of fund economic counselor and research director Olivier Blanchard is significant. Fund research is always published with the caveat that it represents the views of the researcher, not the institution itself. But this paper comes from the top, and attempts to put to rest an issue that has been at the center of debate about how fast countries should move in their efforts to tame large debts and deficits.
If fiscal multipliers are small, countries can cut spending faster or raise more in taxes without much short-term damage. If they are large, then the process can become self-defeating, at least in the short run, with each dollar of government spending cuts, for example, costing the economy more than a dollar in lost output and thus actually increasing debt-to-GDP ratios.
That is what has been happening with a vengeance in Greece, where fund forecasters, as part of the country’s first bailout program in 2010, predicted that the nation could cut deeply into government spending and pretty quickly bounce back to economic growth and rising employment.
Two years later, the Greek economy is still shrinking and unemployment is at 25 percent.
Of course no two circumstances are alike. Shut out of international bond markets, Greece had little choice but to begin bringing its public finances into line or face a catastrophic default. Financing wasn’t available to sustain prior spending levels. For an economy that has been reeling for several years, however, a billion or two in extra government programs or investment could have kept a few small businesses open and kept a few more families employed and spending.

“Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation,” Blanchard and co-author Daniel Leigh, a fund economist, wrote in the paper.
That somewhat dry conclusion sums up what amounts to a tempest in econometric circles. The fund has been accused of intentionally underestimating the effects of austerity in Greece to make its programs palatable, at least on paper; fund officials have argued that it was its European partners, particularly Germany, who insisted on deeper, faster cuts. The evolving research on multipliers may have helped shift the tone of the debate in countries like Spain and Portugal, where a slower pace of deficit control has been advocated.
But the paper includes some subtle and potentially troubling insights into how the fund works. Blanchard – effectively the top dog when it comes to economic science at the fund – writes in the paper that he could not actually determine what multipliers economists at the country level were using in their forecasts. The number was implicit in their forecasting models – a background assumption rather than a variable that needed to be fine-tuned based on national circumstances or peculiarities.
Heading into a crisis that nearly tore the euro zone apart, in other words, neither Blanchard or any one of the fund’s vast army of technicians thought to reexamine whether important assumptions about the region would still hold true in times of crisis.
That, it turns out, was a big mistake. Multipliers vary over time: They may be low in a country where the economy is growing, interest rates are normal and the banking system is sound. As this research showed, they get larger if interest rates are low, output is falling and the banking system is creaky – conditions that make everyone, from households to investors, less likely to spend, and thus makes the role of government-generated demand that much more important.
Blanchard and Leigh deduced that IMF forecasters have been using a uniform multiplier of 0.5, when in fact the circumstances of the European economy made the multiplier as much as 1.5, meaning that a $1 government spending cut would cost $1.50 in lost output.
What are the implications for the future?
This paper may not be an official position of the IMF, but coming from the agency’s top economist, it is bound to change how the agency generates forecasts.
As for fiscal policy – an issue of interest as the U.S. debate turns towards austerity – Blanchard and Leigh said a better understanding of multipliers does not produce any definitive conclusions.
Many countries still need to cut their deficits – some faster, some slower, depending on a host of other factors.
“The results do not imply that fiscal consolidation is undesirable,” the two write. “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. The short-term effects of fiscal policy on economic activity are only one of the many factors that need to be considered in determining the appropriate pace of fiscal consolidation for any single country.”

TAGS
Austerity, Austerity and its discontents, IMF, Olivier Blanchard

palintropos
6:39 PM GMT-0200
This is an example of burying the message with a contradictory headline. Towards the end of the article it seems to say IMF cannot trust data from the country level. That is buck-passing, no? So, no mea culpa (my fault).
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ticked
5:46 PM GMT-0200
It's pretty simple stop wasting $1.5+ TRILLION a year on defense, 146 security forces, 16 intel agencies/depts and 700+ foreign military bases....approx. two times all rest of world combined military spending quit spending on destruction, killing and maiming.and use the money on fixing America
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RonScheurer
4:35 PM GMT-0200
Is it budget cuts or spending priorities that need a more serious look? If the US cut spending on all Middle Eastern civil wars, Arab and Israeli; and the quiet one in Pakistan, (and quite possibly in other places where transparency does not exist), there might be no need to raise the debt limit. Republicans would not like that because military activity does not involve positive economic, inventory accountability.

Destruction itself is seen as positive. Reducing educational options for student financial aid decreases the size of an intelligent populace while increasing cannon fodder. Reducing health benefits increases collateral body counts as does the pirating of those benefits by drug companies and insurers. Reducing Social Security to the under $30,000 a year folks guarantees an increase in their attrition rate into poverty.

"Happy Days Are Here Again" are a long way off unless both parties wake up, shed their internecine squabbling, and do for all of the voters, rich, poor, and between, what they are being paid to do - create equity for all, not equality, EQUITY. Equality is a myth.
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h3lt025
4:34 PM GMT-0200
What every single economist, in the entire world, needs to do TODAY is to publicly admit that they have no idea what they are doing and what they are doing is NOT A SCIENCE. They can predict NOTHING reliably with variables like "fear", "greed" and "desire". It is 100% crap, and it is being applied in ways that MASSIVELY affect people's lives.
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DavidGonzales
4:12 PM GMT-0200
An excellent, eye-opening article. May every Republican read this--read it and weep. The multipliers are connected to a country's condition and the IMF economists didn't even bother to investigate the conditions of the countries under consideration, as it says in the article--they just took it for granted that the number proposed as a multiplier was correct. Oh, brother.
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DavidGonzales
4:18 PM GMT-0200
I forgot to mention that the Republicans want too much austerity for the condition of the US right now--Republican austerity will cause needless suffering and damage the growth of the economy as well.
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jdgreger@yahoo.com
2:20 PM GMT-0200
Hey Eddie14 and all Krugman clowns, Greece is suffering because their economy was a government central planned structure and debt based economy. If you stop spending, the economy suffers cause you have no private sector producing. Greece along with Europe and eventually US are all based on flawed Keynesian "economics" (it's really a pyramid scheme) of spending and borrowing instead of saving and producing. See Japan the past 20 years, all they've done was build bridges and roads and they are still in deflation mode and now their debt to GDP is 240%...lol

You can't spend your way to prosperity because the gravy train eventually ends (e.g. greece), then eventually the United States. The interest rates are only low here because the FED is buying and keeping them artificially low. They can't do that forever and our debt masters will stop lending and or ask for higher rates and that's when the crap really hits the fan.

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JEHR
3:58 PM GMT-0200
jdgreger, do you even know what you are saying? When austerity is imposed, spending ends and so does saving. If money was spent on creating jobs (instead of propping up zombie banks), then the people would earn a salary, could spend on their needs and the economy would begin recovering. The secret is making jobs available. If the private sector can't (or won't) create jobs, then the government should. It can always afford to create jobs just as it can always afford to bail out banks to the tune of trillions of dollars.

All economies are "centrally planned" by someone!
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DavidGonzales
4:09 PM GMT-0200
Hey, jdgreger, did you read the article? Every country has its own multiplier connected to the conditions at the time under consideration--the cuts in Greece were too deep and caused a lot of needless suffering and underspending.

palintropos
1:52 PM GMT-0200
Following the logic of most commenters, the wealthiest countries should have been communist ones.
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OpenMindDC
1:45 PM GMT-0200
If only the righties read this stuff.
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ggant
1:36 PM GMT-0200
Can anyone get this the Idiots in the House? Do even read papers. Oh No facts, keep away , keep away. Facts are bad.
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scatchy
1:33 PM GMT-0200
This is an important admission, as it shows that the Republicans plans for austerity, which basically mirror what was put in place in Greece and the rest of Europe, would have undermined our economic recovery.
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