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Why Austerity May Be Worse Than We Thought–And Hard To Predict

Taking an axe to a governmental budget can cut off growth in a most troubling way. Indeed, austerity has proved worse for a country than most economists suspected.

That is, in essence, what a new IMF paper says. The conclusion: Recent austerity measures have been followed by lower-than-expected economic growth, and economists really struggle to predict austerity’s effects at the start. By the end of the campaign, they’re better at it, the paper says—yet, most people become better at their jobs after doing the work for several years.

The paper comes after a noticeable change from the IMF, which only recently became an outspoken critic of austerity. The IMF’s top economist, Olivier Blanchard, and another research economist, Daniel Leigh also concluded in the paper that the the IMF should not have supported quick budgetary cuts in the beginning of the financial crisis. Economists had thought that for each euro cut from a budget, the economy would lose about 50 cents in growth. Turns out, it was about triple that, closer to 1.50 euros in growth.

Put another way, cutting a government’s budget, as an economy capsizes, is sort of like if a sailor falls overboard and then his crew members stand safely on deck and expect him to make it back on the ship in about five minutes. He has swam that far, that fast before, and there’s no reason to expect that he can’t do it again. But, oh, there’s also a once-in-a-lifetime storm raging all around.

In a nation, cutting a government’s budget can, in turn, limit consumer spending and confidence—key components of any developed economy. If you’re getting fewer tax breaks and less support, you are likely joining the budget-conscious hoard at Wal-Mart, not perusing the aisles of Kroger or Whole Foods. You’re in the bargain-bin basement, shopping at Sears, not Macy’s. Certainly not at Saks.

Add to that a huge loss in wealth from the stock market and housing crashes and a truly terrible job market and you’ve got yourself a real problem on your hands.

But let’s not have that stop us from going forward with a plan to cut programs from the oldest and the sickest among us, provide no relief for crushing student debt burdens as well as fire public employees, bust unions and basically squeeze everyone who is a member of the middle, working and poor classes allegedly because we might have some problems two decades from now. No need to worry about how that might affect the psychology of the average citizen and their willingness to oh .. start a business or otherwise do anything with their money except hoard it under the mattress. They are, on a daily basis, scaring the living hell out of people about future government debt at a time when people are already scared to death about their shaky personal financial future — which the government is working night and day to make even shakier. If I didn’t know better I’d have to assume that somebody’s consciously trying to stifle growth.

Meanwhile, while it’s really moving to see the IMF admit their “mistake” you cannot help but wonder just where the hell they’ve been on this? As my friend Natasha Chart wrote in an email the other day:

The austerity programs implemented in the US and Europe haven’t been quite as harsh (we continue, for now, to have free K-12, SNAP & LIHEAP, etc.) as the ones enforced by international mandate, regardless of the wishes of local governments, but the effects are in line with effects seen during the 80s and 90s in less wealthy countries. Greece is probably nearest on the continuum to getting the kind of crap sandwich once reserved for countries like Indonesia, and their greater social disintegration and unrest bears that out. But it doesn’t seem like a coincidence that massive protests have sprung up in every country hard hit by austerity fever, which is to say that I somewhat doubt the Arab Spring would have sparked the same global convulsions it did without the parallel prescription of global belt tightening in response to the 2008 crash.

If the IMF employs people who are genuinely unaware that this constellation of results always happens in proportion to the speed and severity of sharp public spending cuts, they must be solely staffed with idiots. But I don’t think that’s the case, they’ve consistently acted as ideologues in hock to the interests of international business. If they’re panicking now, it must be the dawning realization that they’re breaking the markets of last resort, whose customer base keeps the parasitization of third world extractive economies churning along.

The IMF is as close, imo, as we’re likely to come to witnessing an archetypal incarnation of the banality of evil. They’re anti-democratic, perennially unmoved by human suffering and useless at having any consistent success beyond enriching the already wealthy.

And like their brethren on Wall Street they may have just killed their own golden goose.

Oh, and by the way, none of this is stopping any of the Western countries, including the US, from barreling forward. Here’s what’s happening in the UK:

Half a million soldiers, nurses and teachers will have their income slashed under the coalition’s benefits crackdown, according to a new report. The chancellor’s sub-inflation rise in benefits and tax credits over the next three years will hit a whole range of the country’s most trusted professionals.

Up to 40,000 soldiers, 300,000 nurses and 150,000 primary and nursery school teachers will lose cash, in some cases many hundreds of pounds, according to the Children’s Society. The revelation appears to contradict the government’s stated intention to target shirkers and scroungers, and will raise the temperature of the Commons debate and vote on the plan on Tuesday.

The analysis, which is set to be at the centre of Labour’s attack on the coalition in the Commons, when Ed Miliband’s party will vote against the policy, reveals for the first time the range of professions that will be hit. By 2015 a second lieutenant in the army who has three children, who earns £470 per week and whose wife does not work will lose £552 a year; a lone-parent nurse with two children, earning the profession’s average of £530 a week, will lose £424 a year; and a couple with two children where the sole earner is a primary school teacher, earning £600 a week, will lose £424.

And what about us?




As Krugman pointed out:

Other things equal, you’d expect government employment to grow with population (remember, the typical government employee is a schoolteacher). And here’s what has happened to government employment per capita:


It’s quite a squeeze. Not exactly “shock therapy” but close.

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