On 3 January 2013, the IMF’s chief economist, Olivier Blanchard, released a working paper discussing the austerity strategy that he and the IMF recommended/required back in 2010. The paper is called Growth Forecast Errors and Fiscal Multipliers, and its content can basically be summarised as “Oopsie! We fucked up”.
Peter Martin at the Sydney Morning Herald:
The IMF, on the other hand, solemnly advised the nations of Europe coming out of the financial crisis to raise taxes and wind back government spending. Its commandments had weight. Yes, it had failed to foresee the crisis in the first place, but it was the lender of last resort. They might need it.
And it had modelled what would happen if they did what it said. For every dollar they cut their budgets, their economic growth would suffer just 50¢. Its forecasts said so.
On Friday, in its first working paper of the year, it revealed the full horror of what did happen. Personally authored by the fund’s chief economist, Olivier Blanchard, the paper said for every dollar those nations cut their budgets their economies crumpled something more like $1.50.
Rather than suffering far less than the savings they made on their budgets, the economies suffered far more. As mistaken advice it’s monstrous – like going to see a doctor who tells you the medicine won’t hurt much and finding it lays you low for years.
The fund forecast that if the eurozone took its advice it would grow 1.8 per cent throughout 2011. It grew 0.7 per cent. Italy would climb 1.3 per cent; it slid 0.5 per cent. Spain would surge 1.8 per cent; it grew not at all.
The errors are completely unlike those made forecasting the Australian budget, which were largely the result of unexpected events.
The shocking thing about the incorrect IMF forecasts confirmed by its chief economist is that there were few unexpected events. The global environment was broadly as forecast. The nations of Europe did what was forecast. The consequence was nothing like what was forecast. The fund misunderstood the mechanics.
As Blanchard put it, his forecasters “significantly underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation”.
His defence is that in normal times they would have got it right. In normal times a budget cut of $1 would have cut economic growth by 50¢. But the times weren’t normal. European interest rates had been cut to nearly zero, meaning there wasn’t the normal room for authorities to cut further, and households were more heavily indebted than normal, so cuts to their income flowed through more quickly than normal to cuts in their spending. And the starting point was different. The European economies had been in recession, which was far from normal. [Emphasis added]
ETA: Of course, Blanchard’s paper doesn’t include an apology for his monumental fuckup, or indeed any concession that austerity might have fundamental flaws. From the paper’s conclusion:
Finally, it is worth emphasizing that deciding on the appropriate stance of fiscal policy requires much more than an assessment regarding the size of short-term fiscal multipliers. Thus, 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. 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.
Olivier Blanchard should be forced to spend the next three years cleaning toilets in Athens for minimum wage, while wearing a sign that says “I am personally responsible for your misery”. Fuck him.