By Georgia Logothetis.
What's the cost of austerity?
The actual cost of severe austerity can't be calculated—the number of lives lost or dreams killed because of families free-falling into poverty isn't an easy number to add up. Now, a new report from the International Monetary Fund has at least quantified the economic damage of austerity ... and it's a number that will shock you.
First, some background. Back in October 2012, this is what the IMF reported:
Earlier this week, the International Monetary Fund made a striking admission in its new World Economic Outlook. The IMF’s chief economist, Olivier Blanchard, explained that recent efforts among wealthy countries to shrink their deficits — through tax hikes and spending cuts — have been causing far more economic damage than experts had assumed.(emphasis added)
At the time, Brad Plumer at The Washington Post explained the importance:
Economists tend to agree that tax increases and spending cuts hurt growth. The question is how much they hurt growth—a variable that usually changes at different points in time.
This matters a lot for policy. If tax hikes and spending cuts only hurt growth a little bit, then a government with debt problems will want to enact some austerity measures. If a tax increase, on average, raises $10 in revenue but reduces output by $6, that might be painful, but it will ultimately shrink the deficit.(Indeed, those are basically the numbers that policymakers in Britain and elsewhere had been using.)[...]
Blanchard is now arguing that the fiscal multiplier appears to have been much higher over the past few years than policymakers, including the IMF, had assumed. It’s not 0.6. It’s somewhere between 0.9 or 1.7. If true, then countries in Europe and the United States should have been pursuing stimulus measures to boost growth—and not insisting on budget cuts.(Not surprisingly, Paul Krugman is claiming vindication, since this was his view all along.)(emphasis added)
Now, a new IMF working paper released today details the true damage of austerity:
In a new paper published Thursday, IMF Economic Counsellor Olivier Blanchard and research-department economist Daniel Leigh show the IMF recommended slashing budgets too fast early in the euro crisis, starving many economies of much-needed growth.
In “Growth Forecast Errors and Fiscal Multipliers,” Messrs. Blanchard and Leigh calculate IMF and European economists underestimated the euro-for-euro effect of cutting government budgets. While economists expected that cutting a euro from the budget would cost around 50 cents in lost growth, the actual impact was more like 1.50 per euro.
You can read the paper here and Howard Sneider's take on it over at The Washington Post here.
In Greece, which has implemented draconian austerity measures at the request of the IMF, the European Commission and the European Central Bank in order to receive bailout funding, the results are seen on the streets where a middle class has plummeted into poverty. One out of three Greeks now lives in poverty and average salaries have been slashed to just several hundred net euros a month. Homelessness, which was rarely seen in that country, is now endemic in certain parts of Athens.
Read more at http://www.dailykos.com/story/2013/01/03/1176...