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When the IMF begins to rethink fiscal multipliers… January 25, 2013

Posted by WorldbyStorm in British Politics, Economy, European Politics.
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…it’s probably best for politicians to reconsider their adherence to ‘austerity’. As Larry Elliott notes in the Guardian yesterday no such luck in the UK where George Osborne is stubbornly wedded to ‘deficit reduction’ at seemingly all costs, up to and including a triple dip recession (see the latest figures from the UK economy, not looking great in that respect).
Elliott draws attention to the fact that the IMF’s chief economist Olivier Blanchard is concerned over Osborne’s approach:

Three factors probably lie behind Blanchard’s decision to go public with his concerns. The first is that the IMF, while supporting the need for budget deficits to be reduced, believes action should not be so aggressive as to derail growth. The second reason is that it has done some recent work on fiscal multipliers – the knock-on effects of tax and spending changes on the wider economy – and found them more powerful than it previously thought. The third reason, obviously, is that Osborne’s forecasts of a recovery lurking just around the corner have proved totally wrong. The economy has flatlined for the past two years and if the City is right about the fourth quarter 2012 growth figures there will be fears of a triple-dip recession this winter.

But let’s be clear. Much the same can be said about the European wide orthodoxy on this matter. We hear much the same stuff in this polity.
In a way, and this follows on from posts earlier this week, it exemplifies the confusion (and quite a deliberate one at that) between the use of austerity as a methodological tool and an ideological crowbar used to rework the socio-economic dispensation existing across much of the EU and to the satisfaction of neo-liberalism.

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Comments»

1. ejh - January 26, 2013

Me, I’d like two things.

One is for the IMF to actually call for a rethink where it’s really hurting, to wit in Greece, Ireland, Italy, Portugal and Spain. We’re a wafer-thin mint away from six million unemployed in Spain, a million of these having been added since the labour market reforms (“brave” according to Ms Lagarde) were introduced. Do I hear the IMF saying enough is enough in Spain? I do not.

Two, for people like Elliott (who I admire) to hold off from their “the IMF is right” spiels until this happens.

WorldbyStorm - January 26, 2013

I think it’s more a case of if even the IMF is saying halt then the orthodoxy is now blatantly political rather than that the IMF is ‘right’. Here the IMF has played an expedient ‘good cop’ to the ECB and the Commission’s ‘bad cop’. But somehow the hoops remain as difficult to jump through. So I’d definitely agree that the IMF has zero credibility in its actual as distinct from rhetorical pronouncements.

CL - January 26, 2013

Any economist who becomes the chief economist for the IMF is an orthodox, conventional economist. Orthodoxy reconciled Keynes and the neoclassicals a long time ago; it is known as the neoclassical synthesis.
This is why conservative economists such as former Reagan advisor Martin Feldstein can criticize the Obama stimulus for being too small.
It is why Olivier Blanchard can murmur about ‘excess fiscal consolidation’
http://www.businessspectator.com.au/bs.nsf/Article/markets-world-growth-financial-system-fiscal-cliff-pd20130125-49V82?OpenDocument&src=sph
It is also why Larry Summers in Davos can call for a more softly softly approach to deficit reduction
http://blogs.reuters.com/chrystia-freeland/2013/01/25/davos-prescriptions-for-the-u-s-economy/

It is true that the Germans have been more influenced by the Austrian school than by the Anglo-American neoclassical synthesis, but the Austrians are not neoclassicals, and some historians of economic thought even place them outside the ‘orthodox’ camp.


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