From the TUC

Keynes was right, IMF admits. And the deficit fetishists are wrong.

09 Oct 2012, by in Economics, International

The IMF’s world growth forecasts issued last night were, bizarrely, not front page news in most papers this morning, despite the UK’s growth estimate being cut by more than any other OECD economy bar Italy. Slashing the growth rates of most industrialised and emerging economies (apart from the USA, where the growth prediction went up, on the assumption that a deal is reached on the budget) is only part of the news though. Far more revealing is the IMF’s explanation of why the IMF’s growth estimates have been persistently over-optimistic – covered in the report in a two-page box on page 41 co-authored by IMF Chief Economist Olivier Blanchard. An admission – what follows is really over-simplified, for clarity and brevity – apologies.

The IMF now accepts that for every £1 cut from government spending, the reduction of economic activity as a whole is potentially as much as £1.70 – far higher than the £1:£1 ratio the IMF’s original predictions were based on, and of course in completely the opposite direction that British Government policy is based on: that cuts in Government spending will be more than replaced by increased private sector expenditure (based on the so-called ‘crowding-out hypothesis’.)

So, the IMF is now said to be alarmed that the relentless austerity measures of most of the developed world could lead to weaker and weaker growth even in the emerging economies like Brazil and China. But, bizarrely, this hasn’t stopped the IMF from continuing to support the cuts that Governments like Britain’s are imposing.  As former European trade union economist Andrew Watt puts it: “the patient is dying, increase the dosage!”

The argument that changes in Government spending have a greater impact on the economy than 1 is of course central to Keynesianism, and while Keynes is most famous for arguing that increased Government spending creates a ‘multiplier’ of greater than 1 (hence his counter-intuitive allegory involving the state paying workers to bury cash, and letting the private sector dig it up again), cuts in Government expenditure also have a multiplier effect greater than 1. As the IMF now appear to have realised.

Instead of continuing austerity, we urgently need measures to restore growth, because that is the only sustainable (let alone morally acceptable) way to cut deficits.


8 Responses to Keynes was right, IMF admits. And the deficit fetishists are wrong.

  1. Andy Sherwood
    Oct 10th 2012, 9:03 am

    Too right, but the growth we need needs to benefit the poorest in our society, strong growth that predominantly benefits the rich which we experienced before the banker’s recession will not be sustainable.

  2. Owen Tudor

    Owen Tudor
    Oct 10th 2012, 9:24 am

    Indeed. We need growth AND fairness, which means there’s a little bit of catching up to do!

  3. Eddy Ventolera
    Oct 11th 2012, 10:09 am

    Economists who look for magic ‘constants’ are doomed to get it wrong. The multiplier is a variable which depends on other parameters – like sentiment to name the least tractable of them. Similarly the Laffer curve changes it shape (and the position of its maximum) depending on the state of the economy.

    Correlation coefficients calculated from one economic episode will not necessarily apply to a different episode. To assume they will is to assume we will repeat our mistakes – the basis of a reductio ad absurdum argument that says you can’t base a useful predictive theory solely on historical statistics.

    The devil is in the detail. Too much current economic analysis is superficial.

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  5. Social-Security Cuts Will Cause Economic Damage, IMF Report Reveals « A New Place Of Exile
    Oct 12th 2012, 11:23 pm

    […] [3] For a much more expert analysis than I can offer here, see Keynes was right, IMF admits. And the deficit fetishists are wrong by Owen Tudor cf. TouchStone; 9th October 2012:… […]

  6. joey2times
    Oct 13th 2012, 3:02 pm

    Tell that to Greece, then Spain, then Italy, Argentina…ad infinitum.

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