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WaPo has an interesting article that I think everyone should read in which the International Monetary Fund which called for austerity measures for European countries in debt crisis, had its lead economist to admit they were wrong, apparently because they "did not fully understand how government austerity efforts would undermine economic growth."

I'm not an economist, so I don't want to critique this too much, but I might add, that this is why we should all read Paul Krugman. He knows his shit. He was right about the housing bubble and now this.

Back to the article:

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.
The relevant conclusions from the paper:
“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.
What's interesting is that some of the initial motivation for the IMF decision was probably political, rather than actual economic principles and knowledge:
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.

On the other hand, they might not know what they are doing:

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.

This article might be a lesson for those pushing for drastic cuts in the United States, since there will clearly be short term effects.
“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.”
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Comment Preferences

  •  I though they knew but didn't care. (4+ / 0-)

    i stand corrected.  also, did hell freeze over?

    sometimes I spend more time reading the comments than the diaries. no offense to diarists: thanks for the launch pad.

    by dunnjen on Fri Jan 04, 2013 at 08:43:56 AM PST

  •  Bbbbut Europe is so Olde World (0+ / 0-)

    America has to cut because!
    And Also!

    The GOP austerity plans will fuck us over so badly, that the whole world will suffer. TeaBaggers will rejoice, until they find folks with pitchforks greeting them when they return from DC. Out of work, no benefits, no food, no hope, but a hell of a lot of anger.

    What we call god is merely a living creature with superior technology & understanding. If their fragile egos demand prayer, they lose that superiority.

    by agnostic on Fri Jan 04, 2013 at 08:45:28 AM PST

  •  Good piece. Any chance any Rs in Washington (0+ / 0-)

    will read and believe it?

    **Your beliefs don't make you a better person, your behavior does** h/t Clytemnestra/Victoria Jackson

    by glorificus on Fri Jan 04, 2013 at 08:45:32 AM PST

    •  Any rational thinkers have probably been purged (2+ / 0-)
      Recommended by:
      glorificus, Cassandra Waites

      The R brand is full of magical thinkers that have been resistant to all cause and effect for decades.  As long as the pay masters are happy and the saps can be suckered, the Cons aren't giving.

    •  They can't read! (1+ / 0-)
      Recommended by:

      educashun hurts

      A conservative is a man with two perfectly good legs who, however, has never learned how to walk forward. Franklin D. Roosevelt

      by notrouble on Fri Jan 04, 2013 at 08:58:48 AM PST

      [ Parent ]

    •  Economics is a science. (1+ / 0-)
      Recommended by:

      Most republicans won't read (presuming they still can after watching Fox News for so many years) or if they do read it won't believe it because it is scientific.

      I hate to continually run down a group of my fellow men (and women), but gee whiz these folks are dim bulbs with hearts of stone.

      I am a 67 year old teacher...teaching computer applications in a Texas high school. I've already retired once but it didn't take.

      by 43yearsateacher on Fri Jan 04, 2013 at 01:56:38 PM PST

      [ Parent ]

  •  Love how paper says they should use this (2+ / 0-)
    Recommended by:
    notrouble, Cassandra Waites

    to adjust their forecasts.  But doesn't say anything about adjusting their policies.

    Chuck Hagel for Defense Secretary

    by Paleo on Fri Jan 04, 2013 at 08:49:46 AM PST

  •  Any Keynesian could have told them that (2+ / 0-)
    Recommended by:
    jan4insight, Cassandra Waites

    ahead of time.

    Chuck Hagel for Defense Secretary

    by Paleo on Fri Jan 04, 2013 at 08:50:10 AM PST

  •  Are Democrats ceding all to the GOP? (0+ / 0-)
    The GOP austerity plans will fuck us over so badly
    Any chance any Rs in Washington will read and believe it?
    Have we all lost faith in our Democratic reps in congress?

    "Who are these men who really run this land? And why do they run it with such a thoughtless hand?" David Crosby

    by allenjo on Fri Jan 04, 2013 at 08:53:05 AM PST

  •  Kind of like when Greenspan said (1+ / 0-)
    Recommended by:

    Everything he believed was wrong

    Not once but twice.

    "We were all wrong"

    Greenspan admits "Flaw" to Congress

    But the Trickle Downers, Wealth Protectors, Austerity Mongers, Ayn Randian, Safety Net cutters, persist and we allow them to persist in telling us about the shared sacrifices we need to make to subsidize their insatiable greed and immorality and sociopathy.

    If I had a nickel for every time some inane politician or pundits says "Simpson Bowles" which didn't even issue a consensus, because there wasn't one I could be a sociopathic wealth worshiper too.

    “Human kindness has never weakened the stamina or softened the fiber of a free people. A nation does not have to be cruel to be tough.” FDR

    by Phoebe Loosinhouse on Fri Jan 04, 2013 at 09:11:13 AM PST

  •  Gee, you shoot youself in the foot, and (0+ / 0-)

    discover that you limp, or cannot even walk.

    Who knew ?

    "..The political class cannot solve the problems it created. " - Jay Rosen

    by New Rule on Fri Jan 04, 2013 at 09:40:09 AM PST

  •  OH, boy, another case of surprised economists. (3+ / 0-)

    I really shouldn't mention who is always calling out instances of economists who are regularly surprised by weekly or monthly economic results. So I won't. But you all probably know who I mean.

    Moderation in most things.

    by billmosby on Fri Jan 04, 2013 at 09:51:11 AM PST

  •  So wait, after they wrecked Latin America, Africa, (2+ / 0-)
    Recommended by:
    champain, Cassandra Waites

    Much of Asia, and now much of Europe and America with shock, austerity, NOW they're willing to admit they royally screwed up?'

    Whatever man.

  •  Really, Einstein? (2+ / 0-)
    Recommended by:
    champain, Cassandra Waites

    How much did you get paid to come to THAT conclusion?  Blinding Grasp of the Obvious.  

    The thing about democracy, beloveds, is that it is not neat, orderly, or quiet. It requires a certain relish for confusion. Molly Ivins

    by MufsMom on Fri Jan 04, 2013 at 11:21:26 AM PST

  •  nothing new, the IMF has been pulling this BS (1+ / 0-)
    Recommended by:
    Cassandra Waites

    for years, especially on the african continent. that the head economist would publicly admit he doesn't have a clue would, in a real world, result in him flipping hamburgers for the rest of his working life. not so in the IMF, which is as much of a "good old boys" club, as any other entity. austerity economics has been the IMF's stock in trade, pretty much since its founding.

    its primary function is not, as it would have everyone believe, to help the people of those countries it gets involved with, but to ensure that the banks who lent those countries money get those loans repaid. that's pretty much their sole function. it serves as a funnel, from the taxpayers of wealthy countries, to the bank vaults of the financial community, with a brief, load lightening stop, in the offices of corrupt gov't officials, who take their "taste" off the top. this is how the notorious "Big Men", of song & story in africa, managed to have swiss bank accounts, with millions of dollars in them, along with raping the natural resources of their respective estates, er, countries.

    were i a betting man, i'd bet money that IMF policy won't change.

  •  DUH. Keyne's 1, Freidman 0. Again. (0+ / 0-)

    Who's crazier, the conservatives that push this idiocy despite all evidence that it is wrong, or we the people who let them keep trying their hair brained schemes?

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