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IMF chief economist admits he underestimated the negative impacts of austerity

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01-08-2013, 09:47 PM
  #1
RonFournier
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IMF chief economist admits he underestimated the negative impacts of austerity

Washington Post - An amazing mea culpa from the IMF’s chief economist on austerity
Quote:
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.
(...)
“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.
(...)
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.
Original report: Growth Forecast Errors and Fiscal Multipliers

We already knew that agressive austerity has negative impacts on the well-being of the poor and middle class, now we have evidence showing that it doesn't even help countries' economy. I think it's time for conservatives and libertarians to stop being dogmatic and realize that even their God Adam Smith was more moderate than they are concerning the omnipotence of the invisible hand (see: The theory of moral sentiments, A. Smith, 1790).

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01-08-2013, 09:48 PM
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Gobias Industries
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What would the Austrian crowd have to say about this? Kevin Malone?

Not being cheeky.

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01-08-2013, 10:00 PM
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Tim Calhoun
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It's common knowledge that most austerity in Europe is via tax increases, which the IMF in another paper has shown to be very harmful:

Quote:
Which hurts more in the short run, tax hikes or spending cuts?

Tax hikes, according to IMF research praised by Paul Krugman.

The surprising thing is this is an IMF study that usually gets cited to show that spending cuts don't grow the economy---that "expansionary austerity" is a mere theorist's dream. But this same research also provides evidence that tax hikes cause more trouble than spending cuts in the short run.

Quick summary of the method: The economists looked at 173 "fiscal consolidations" in rich countries, times when governments decided to reduce the long-run deficit. They then checked to see whether consolidations based mostly on tax hikes turned out better or worse than ones based on spending cuts (Inside baseball: They followed a version of the Romer and Romer event study methodology, but applied it to exogenous-looking fiscal tightening instead of exogenous-looking monetary tightening).
http://econlog.econlib.org/archives/...hurts_mor.html
http://www.imf.org/external/pubs/ft/wp/2011/wp11158.pdf


There is also a valuable piece on the subject today on Bloomberg View:

Quote:
After five years of financial crisis, the European record is in: Northern Europe is sound, thanks to austerity, while southern Europe is hurting because of half- hearted austerity or, worse, fiscal stimulus. The predominant Keynesian thinking has been tested, and it has failed spectacularly.
The starkest contrasts are Latvia and Greece, two small countries hit the worst by the crisis. They have pursued different policies, Latvia strict austerity, and Greece late and limited austerity. Latvia saw a sharp gross domestic product decline of 24 percent for two years, which was caused by an almost complete liquidity freeze in 2008. This necessitated the austerity that followed.
Yet Latvia’s economy grew by 5.5 percent in 2011, and in 2012 it probably expanded by 5.3 percent, the highest growth in Europe, with a budget deficit of only 1.5 percent of GDP. Meanwhile, Greece will suffer from at least seven meager years, having endured five years of recession already. So far, its GDP has fallen by 18 percent. In 2008 and 2009, the financial crisis actually looked far worse in Latvia than Greece, but then they chose opposite policies. The lessons are clear.
http://www.bloomberg.com/news/2013-0...s-doesn-t.html

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01-08-2013, 10:28 PM
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01-09-2013, 12:11 AM
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Pepe Silvia
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Austrians, libertarians, etc. aren't denying that spending cuts hurt short term. The whole point is to bite the bullet now rather than have bigger problems in the future. Why continue unnecessary spending, rack up debt, and hurt future generations? Especially when some of these programs will eventually go bankrupt.

I guess it comes down to what you think is more efficient, the private sector or the public sector. I'd rather see the US become as pro business as possible so the private sector can pick up the slack from spending cuts.


Last edited by Pepe Silvia: 01-09-2013 at 12:17 AM.
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01-09-2013, 01:38 AM
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Originally Posted by nds90 View Post
Austrians, libertarians, etc. aren't denying that spending cuts hurt short term. The whole point is to bite the bullet now rather than have bigger problems in the future. Why continue unnecessary spending, rack up debt, and hurt future generations? Especially when some of these programs will eventually go bankrupt.

I guess it comes down to what you think is more efficient, the private sector or the public sector. I'd rather see the US become as pro business as possible so the private sector can pick up the slack from spending cuts.
Since when did "recession" become such a dirty word? Even forest fires have the effect of clearing the land for vigorous, future growth. Recessions take out the excess and rectify the imbalances in the economy.

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01-09-2013, 06:55 AM
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Bruise Bros 2426
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Wait...austerity has harsh effects? The sky...is blue?

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01-09-2013, 10:15 AM
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Kadri43
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This is really annoying. Austrians and Keynesians usually (not always) say totally different things. I would like to see both theories beings used and taught in public institutions alongside one another. There are obviously pros and cons of each. However, Austrian scholars usually dismiss keynesian and vice versa.

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01-09-2013, 11:25 AM
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Burke the Legend
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As others have said, Europeans have just been raising taxes. very few of the nations' in deep shiite have actually cut expenses.

In France they raised taxes through the roof on their most productive citizens while at the same time their idea of government cuts is http://www.telegraph.co.uk/news/worl...d-manners.html. Hiring 3000 manners police for trains.

Is it seriously a mystery why these economies are going into recession with this sort of hopeless idiocy?

Germany did "austerity" more properly 10 years ago: http://en.wikipedia.org/wiki/Agenda_2010. Like Canada did in the 1990s.

BTW Mr. Fournier, what exactly is your great idea? 'Austerity" is necessary because debt is too high that credit ratings have declined and borrowing costs have reached unsustainable levels. These budgets have to be balanced to the satisfaction of the creditors, otherwise the alternative is default, which I guarantee you is worse than "Austerity".

If it makes you feel better to imagine "austery" as some malevolent spiritual force created by greedy plutocrat capitalists to confound the innocent plebes of these countries, something that can be fought with people power, go ahead. Outside of your childish fantasy, the real term for "austerity" is actually "budget balancing", which HAS to be done, cuz after 40 years of deficit spending there is NO MORE CREDIT LEFT TO BORROW AGAINST.

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01-09-2013, 11:42 AM
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WonderTwinsUnite
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Like the IMF cares. They're already in positions of great wealth, influence and power.

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01-09-2013, 12:42 PM
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Ugmo
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Quote:
Originally Posted by Gobias Industries View Post
What would the Austrian crowd have to say about this? Kevin Malone?

Not being cheeky.
Yeah, I wait with baited breath for what Nobel Prize winning economist Kevin Malone has to say on this issue.

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01-09-2013, 12:47 PM
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Ugmo
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Quote:
Originally Posted by Burke the Legend View Post
In France they raised taxes through the roof on their most productive citizens

You mean the "job creators"? Like Gerard Depardieu?

http://www.bbc.co.uk/news/world-europe-19754016

Quote:
French Prime Minister Jean-Marc Ayrault confirmed that there is to be a new 75% tax rate for people earning more than 1m euros (£800,000; $1.3m) a year.

But he insisted that nine out of 10 citizens will not see their income taxes rise in the new budget.
When will the French government stop perpetuating class warfare by discriminating against their "most productive citizens"?

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01-09-2013, 12:53 PM
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Kurtosis
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Quote:
Originally Posted by Ugmo View Post
Yeah, I wait with baited breath for what Nobel Prize winning economist Kevin Malone has to say on this issue.
Baited breath?

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01-09-2013, 01:00 PM
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Ugmo
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Originally Posted by Kurtosis View Post
Baited breath?
Ha... first time I've ever written that phrase I guess. Oops.

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01-09-2013, 01:02 PM
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01-09-2013, 01:15 PM
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Burke the Legend
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Quote:
Originally Posted by Ugmo View Post
You mean the "job creators"? Like Gerard Depardieu?

http://www.bbc.co.uk/news/world-europe-19754016



When will the French government stop perpetuating class warfare by discriminating against their "most productive citizens"?
We've already established that increasing taxes don't help the economy, or are you gonna argue with that IMF report? So how does taxing rich people help?

it will help close defecits in a short term, damaging manner that's less efficient than cutting wasteful/uneconomic government programs. All it really does is make lefties feel good about upper class bashing. It sure won't create jobs or spurn commerce in an economically troubled nation.

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01-09-2013, 01:16 PM
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Sevanston
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France hasn't raised taxes on anybody yet. The tax hike was ruled as unconstitutional.

http://news.yahoo.com/french-panel-o...--finance.html

EDIT: I will admit though that I find the idea of government taxing anyone's income at 50% or higher to be ludicrous.


Last edited by Sevanston: 01-09-2013 at 01:22 PM.
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01-09-2013, 01:18 PM
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Kurtosis
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In terms of the new tax being levied on millionaires in France:

To a certain point I believe the wealthy and more fortunate should of course pay their fair share. At a certain point, however, these arbitrary increases will end up stifling growth. I guess we'll see if that threshold has been reached.

All and all this tax certainly doesn't promote business interests, that is for sure.

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01-09-2013, 01:30 PM
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Kadri43
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Quote:
Originally Posted by Sevanston View Post
France hasn't raised taxes on anybody yet. The tax hike was ruled as unconstitutional.

http://news.yahoo.com/french-panel-o...--finance.html

EDIT: I will admit though that I find the idea of government taxing anyone's income at 50% or higher to be ludicrous.
I am pretty sure that everyone making over the proposed amount would leave the country to avoid the tyrannical regime. Here is an idea, maybe cut some spending.

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01-09-2013, 01:39 PM
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Ugmo
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Quote:
Originally Posted by Burke the Legend View Post
We've already established that increasing taxes don't help the economy, or are you gonna argue with that IMF report? So how does taxing rich people help?
Who said raising taxes helps the economy? What kind of a strawman is this?


Quote:
Originally Posted by Burke the Legend View Post
it will help close defecits in a short term, damaging manner that's less efficient than cutting wasteful/uneconomic government programs. All it really does is make lefties feel good about upper class bashing. It sure won't create jobs or spurn commerce in an economically troubled nation.

So on one hand it will help reduce deficits, but on the other hand all it does it make lefties feel good. Which is it?

Who decides raising taxes is less efficient than cutting government programs - you?

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01-09-2013, 01:40 PM
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Quote:
Originally Posted by Burke the Legend View Post
As others have said, Europeans have just been raising taxes. very few of the nations' in deep shiite have actually cut expenses.
Do you have anything to back this up, or are you just talking out of your ass hole like usual?

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01-09-2013, 01:43 PM
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Ugmo
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Quote:
Originally Posted by buddahsmoka1 View Post
Do you have anything to back this up, or are you just talking out of your ass hole like usual?
Yeah, sounds like nonsense to me. The countries that are in deep doodoo, like Spain and Greece, have definitely cut expenses.

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01-09-2013, 02:03 PM
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Ilkka Sinisalo
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Quote:
Originally Posted by Kadri43 View Post
I am pretty sure that everyone making over the proposed amount would leave the country to avoid the tyrannical regime.
Gerard Depardieu is trying to leave France, but it's possible that they'll need a crane or a forklift to get him out.

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01-09-2013, 02:28 PM
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Burke the Legend
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Greece has the most bloated public sector in the world and didn't cut a single govt worker until mid 2012, years into austerity. They have done everything possible to protect the government class which is the root of the problem.

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01-09-2013, 02:31 PM
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buddahsmoka1
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Quote:
Originally Posted by Burke the Legend View Post
Greece has the most bloated public sector in the world and didn't cut a single govt worker until mid 2012, years into austerity. They have done everything possible to protect the government class which is the root of the problem.
Still waiting for your austerity evidence. But by all means, keep posting ******** so we can continue laughing at you.

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