
IMF Chief Economist apologizes for being wrong on austerity - martythemaniak
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/03/an-amazing-mea-culpa-from-the-imfs-chief-economist-on-austerity/
======
natural219
This conclusion was immediately obvious to anyone in 2009 who had ever picked
up a basic macroeconomics textbook. The funny thing to me is not how Germany
continues to lead the charge for more austerity -- it's in their banks' best
interests. Rather, it's funny how this 'new' argument of austerity-driven
recovery seems to be taken as somehow valid or relevant for macroeconomic
analysis in other countries.

For instance, the Debt Ceiling crisis of 2011 [1] is a perfect example of how
these kind of psuedoscientific ideas can cause real harm to a country.
Especially given how readily certain groups ( _cough_ republicans _cough_ )
are willing to accept these ideas with virtually zero backing or acceptance
from established economists.

See also: Everything Paul Krugman has ever written.

[1] [http://en.wikipedia.org/wiki/United_States_debt-
ceiling_cris...](http://en.wikipedia.org/wiki/United_States_debt-
ceiling_crisis)

[2] <http://krugman.blogs.nytimes.com/>

~~~
cantastoria
I think the real pseudoscientific idea is that debt-financed stimulus is the
cure all for any economic ill. The argument that Greece needs to get further
into debt to solve it's debt crisis seems insane to me. At this point how much
good could a stimulus really do (even if they could find someone to lend them
the money to do it). I know the standard Krugman/Keynsian style argument here
but it doesn't seem to make much sense in Greece. As another poster said it
seems the only real cure for Greece is going to be inflation, probably and
unfortunately similar to what happened in Argentina.

~~~
Steko
Greece needs to start throwing millionaires in dingy prisons to make any
headway with its problems. The Greek crisis, more than anything, is the result
of massive tax evasion.

~~~
lyudmil
That's a hypothesis, but it seems unlikely since there are four other European
economies facing identical problems - Spain, Italy, Portugal, and Ireland.
Spain in particular was a very reasonably managed economy before the crash,
running surpluses and growing. So, your hypothesis would require that you
attribute the problem in each of these economies to separate causes, which is
probably wrong.

This is not to say that there wasn't gross economic mismanagement on the part
of the Greek government, but focusing on that distracts from the real
solution.

UPDATE: I'm in complete agreement with everyone pointing out that the problems
aren't identical. Perhaps the question is whether, if you were to summarize
the causes Euro crisis in broad terms, you ought to mention Greece's economic
mismanagement first or the overall crash of the financial markets as the more
important factor. My assertion is the latter, mostly echoing Stglitz's
analysis here:

[1] <http://www.youtube.com/watch?v=GdP-Fab8JX8>

[2] <http://www.youtube.com/watch?v=4Ezn8Sgzxd8>

~~~
ameister14
The problems aren't identical. They may appear so because some of the symptoms
are the same, but the root causes in Ireland, for instance, are far different
than in Greece.

Spain is closer to Ireland in terms of housing market effects on economic
downturn, but ultimately each economy functions on a different system, so it's
not entirely wrong to attribute economic problems to separate causes. There is
some overlap, of course, but it's definitely not identical.

~~~
lyudmil
I agree the situations aren't identical, but what theory do you think best
explains all the observations?

Just to be clear, my answer is: Each country's problems are rooted in the
collapse of the US housing market and the resulting financial crunch. The
country-to-country variations are there and they're significant, but
secondary.

------
iwwr
Taking in more debt to pay for old debt is not sustainable. I suspect this
crisis will be deflated by some measures of default (refusing to pay back
debt) and inflation. In no way can western states sustain the entirety of
their assumed obligations (to bond holders, social beneficiaries and special
interest). People are getting stiffed on old debt, it's only a matter of who,
how much and how soon.

~~~
gph1
Debt is a symptom, not the problem. The problem is a currency union with no
central fiscal agent that can assume liabilities and enable transfers from
wealthier to poorer states. That's how the US works. The euro crisis has been
baked in from the beginning.

Which is why it's inaccurate to generalize this problem to "western states".
The US is not comparable to any EZ country. We have our own currency and have
been able to run large deficits to counteract the demand shortfall caused by
the financial crisis and allow the prvt sector to repair balance sheets. This
is why the recovery in the US has been much better than the UK or the EZ.

~~~
InclinedPlane
More so, the economic disparities throughout the US are far less than in the
Eurozone. In the US, per capita GDP between states varies by about a factor of
2 (from mid 30k to mid 60k). In the eurozone the difference is closer to a
factor of 3.5 (from mid 10k to around 50k). However, even that statistic is a
bit misleading due to population because a lot of the lowest per capita GDP US
states also have fairly smallish populations compared to Eurozone countries.
If you add up the populations of all the US states with per capita GDP's less
than 40k you get a total population of about 42 million. If you do the same
for the Eurozone the total population is about 140 million, or nearly half the
population of the entire Eurozone. Similarly, over 30 million people are
living in countries with per capita GDP less than 30k, whereas even the
poorest US state is higher than that.

Also, the wealthiest Eurozone countries are not as wealthy as the wealthiest
US states, by a fairly significant margin. On the whole the Eurozone ends up
being on average about as wealthy, in per capita GDP, as arkansas. The whole
system is in need of far greater management than the US dollar but lacks the
power to do so, and in total has far less wealth to be able to spend their way
out of the problem.

------
tokenizer
Why can't all of these countries take a page from Iceland? I mean, in 2008 it
defaulted on the ridiculous amount of debt they had, and now, 4+ years later,
are improving their international credit rating, and building their economy. I
would speculate from articles that I've read that they're at least back to
where they were prior to the collapse.

A Link: [http://www.independent.ie/business/irish/dan-white-the-
econo...](http://www.independent.ie/business/irish/dan-white-the-economic-
return-of-iceland-has-proved-that-the-joke-was-on-
us-3327164.html?ftcamp=crm/email/20121219/nbe/AlphavilleHongKong/product)

~~~
InclinedPlane
Iceland is a blip, it's irrelevant to the global economy. If it were a city in
Europe it would be something like the 92nd largest city. As a country it's
even smaller and less relevant than Luxembourg.

When a country of 320,000 people defaults on their debt it doesn't have
significant global consequences. When you start defaulting on debt on behalf
of 50, 100, or 150 _million_ people then it starts having very serious
consequences on the creditors, on financial markets, and so forth.

~~~
brc
The problem I have with this argument is that while everybody suggests Iceland
is too small, nobody is brave enough to suggest at what the magic line that
cannot be crossed is. Is Ireland too big? What about Greece? Japan? the UK?

I fail to see how a credit writedown for both debtor and creditor suddenly
becomes unworkable when it crosses an imaginary population or gross debt line.
Plenty of very large companies have undergone debt restructuring and survived
to tell the tale. GM was one of the largest companies in the world and the
debtors and creditors + equity holders all got wiped out or were given a
severe haircut. If the same argument was followed someone would point to a
smaller company and say ; well, they are small, it's OK to default. But that
big company, no, that's too big.

Nobody pretends that calling an unsustainable and unpayable debt defaulted is
a pleasant experience, but it's better to put zombies to the death rather than
have them zombie-walking around the economies of the world. If the debt can't
be paid back, adding more debt to it is never going to get solved. Anyone who
suggested that fixing GM with another set of super-sized loans would have been
laughed out of the room - they couldn't make the payments as it was. Yet
someone this makes the magic jump from company to country and it's considered
sound advice.

Well, not to me.

~~~
InclinedPlane
Oh, I'm not saying that default isn't an option, it might even be the best
option. But the idea that it's a _good_ or even "ok" option is a faulty one.
The game right now is finding the best bad option to work with.

------
cantastoria
_Shut out of international bond markets, Greece had little choice but to begin
bringing its public finances into line or face a catastrophic default.
Financing wasn’t available to sustain prior spending levels._

I'm confused. If Greece couldn't borrow money to sustain its prior spending
levels what choice did they have? How is a Keynesian-style stimulus possible
if no one will lend you the money to implement it? It also doesn't make any
sense to me why a stimulus plan would have worked. Lending Greece more to
perpetuate its already unsustainable expenses doesn't make much sense. It
seems the Keynesian argument here is that they need to do stimulus - i.e.
borrow and spend - even more then the pre-austerity level just to get the
economy back to the previous (and unsustainable) debt levels. It's running to
stand still.

~~~
lvh
If they were in control of their own (fiat) currency, like the pre-Euro
drachma, they could simply print more money.

(FYI, I'm not saying I think this is a good idea; I'm trying to explain what
they _could_ , theoretically, do.)

------
wallflower
Other people have said it better but the basic gist seems to be that austerity
is wealth transfer from the poor and medium class to the wealthy.

"The result is ever greater levels of social inequality, as wealth is
funnelled from the bottom to the top.

Big business, the banks and the super rich are being increasingly relieved of
paying taxes.

The resulting deficits in state budgets, exacerbated by the hundreds of
billions awarded to the banks in government rescue packages, are now being
addressed through a combination of increased consumption taxes, which fall
most heavily on the working class, and savage cuts in social programs and
public sector jobs and wages."

~~~
lyudmil
That is part of it, but I think there's another piece to the puzzle.

The private sector in general is in crisis because the banks won't lend. They
won't do that because of the problems on their financial sheets - they know
they hold toxic assets and they know everyone else does, so they cannot trust
anyone to pay off their debt, including other banks. This means that private
investment has decreased severely, which puts enormous downward pressure on
the economy.

Since the private sector won't invest, the only source of investment big
enough to fill the hole (which might be as big as $8 trillion), is government.
Austerity is a problem because it limits the governments ability to invest,
which means that you have a shrinking economy trying to make up ground, which
is a losing battle, especially for the poor as you point out, since they do
not have the assets to absorb the economic hit.

I should say none of this is my opinion, I'm merely summarizing Krugman,
Stiglitz, and Baker, who are the three economists whose work I've followed on
the matter.

------
bcoates
Where's the apology part? Oliver Blanchard was not an austerity hawk before,
so still not being one is not some sort of shocking turn.

edit: to be specific, he claims to be a non-fairweather Keynesian: stimulus on
the downturn, austerity in good times. They seem to have a cyclical lifecycle
and are all off somewhere spawning when it's time for the cuts.

------
pash
Let me summarize the paper's main finding in plain English: the more spending
cuts economists predicted, the worse were their predictions of a country's
economic growth.

Slightly more technically: there is a correlation between (a) the magnitude of
economists' forecasts of cuts in government spending and (b) the quality of
their forecasts of economic growth.† The higher the forecast of spending cuts
for a particular country, the farther from reality was the growth forecast.

The paper concludes: expected reductions in government spending cause bigger
drops in economic output. I leave it to the reader to consider alternative
explanations.

† — In 26 European countries. Recently. On average.

------
waterlesscloud
The paper also looks at taxation in a crisis, and has this interesting part:

"For example, based on U.S. data, Romer and Romer (2010) find that, in
response to a tax increase, GDP, investment and consumption all decline, but
investment growth falls by about four times more than consumption growth
does."

The reference is to this paper:
[http://emlab.berkeley.edu/~dromer/papers/RomerandRomerAERJun...](http://emlab.berkeley.edu/~dromer/papers/RomerandRomerAERJune2010.pdf)

------
fennecfoxen
Mm. I'm sure Greece _could have_ theoretically cut more deeply into its
government spending and improved the economy. Unfortunately, the people doing
these sorts of cuts aren't a committee of neutral, emotionally detached
economists, they're a bunch of politicians, and they have an electorate to
answer to.

(And they say that the premise of democracy is the belief that said electorate
knows what it wants, and deserves to get it good and hard. :P)

~~~
gph1
You must have an interesting definition of "improve".

~~~
fennecfoxen
Basic economists' definition: opportunity cost. If the government spends a
dollar and gets a worse result than the dollar would have gotten if it stayed
in the private sector, then the economy is worse off. (That includes what the
dollar would have bought, and any damage to incentives to
work/save/innovate/invest/buy capital/take risks/etc that came from collecting
that dollar from its previous owner.)

Of course, if you want to reinvigorate the economy, you'd do better to do
something about the bureaucracy first - you know, the bureaucracy that
requested stool samples from the guy who wanted to run a (bottled-)olive-oil
export website.

~~~
gph1
No doubt there is plenty of wasteful and inefficient government spending. But
I don't think the opportunity trade off works like you suggest.

It's not as if the government is removing otherwise productive dollars out of
the economy to fund its deficits. Treasuries are generally purchased with
excess reserves from the primary dealer banks that would otherwise just sit
there. Or foreign governments, corporations, institutional buyers looking to
stash their cash holdings where they will accrue risk free interest.

We can quibble about multipliers, but deficits represent a net income flow
into the private sector and hence have an expansionary effect on demand (even
if, unfortunately, those dollars are flowing into the pockets of crony defense
contractors and what not).

~~~
fennecfoxen
Deficit-financed credit to expand demand sounds great, just like using credit
card debt to finance an expansion in my own personal spending power sounds
great: there are some times it makes sense but by and large you're fooling
yourself if you think it leaves you more financially sound.

But... Treasuries? Another day, I'd contest your zero-opportunity-cost
suppositions (cf. "crowding out") but more importantly, Greece's bonds don't
have anywhere _near_ the credibility of Treasuries, and they're having real
problems issuing new ones. You can't finance expansion with deficits if _no
one will lend you money_.

~~~
gph1
Agreed re: Greece. Greece's bonds don't have the credibility because they
aren't denominated in a currency that Greece controls.

There's no reasonable analogy between the US running a deficit and anyone's
credit card. Again, like the commenter at the top of the thread, public and
private finance are two different things. The US has _infinite_ spending
power. The constraint is not "affordability" but inflation. That's it. A
"financially sound" budget for the US is one that maximizes employment with
the minimal amount of inflation. It has nothing to do with deficits or
surpluses.

You need to look at the federal budget as part of a closed loop of spending
and income flows with the private, public and foreign sectors. Just like every
country can't run a trade surplus, the public private and foreign sectors
can't all run a surplus or a deficit. It has to net out. If the private sector
runs a surplus (spends less than it earns) of 4% GDP and we have a current
account deficit of 4% GDP, the gov't deficit will be 8%. It's just accounting.

------
dnunes
It seems that the IMF's statement fails to take into account the many measures
Greece didn't implement, namely pertaining to labor laws.

In the context of countries like Greece and Portugal, austerity just means
that the governments can't spend more money than they earn, simply because
they don't have access to it on international financial markets; the only
money they have now is the Troika's. More money from the Troika means more
debt, more interests to pay, and longer dependency on outside help.

Also, the main cause for the recession is that the governments want to correct
the deficit by raising taxes, that is, by imposing austerity on their people,
not on their spending. These countries avoid structural changes, which should
target things like labor laws, the unsustainable Social State, the judicial
systems, and create conditions to attract foreign investment.

I don't really understand how people can advocate for government stimuli in
these countries when that's the sole reason they're in this mess to begin
with.

------
TwoBit
WTF. I took Econ 101 and 102 and it was plainly obvious. I wonder if America's
conservatives are starting to influence European thinking.

------
beedogs
Why do we put incompetent people in charge of things like this?

~~~
hostyle
dishonesty is part and parcel of the trade in banking and politics. competent
people tend to stay away from dishonesty.

