Austerity is costing UK an extra £76bn, says IMF

Somerville · Oct 15, 2012

This is the core of the present debate, not only in the US but in most of the developed world.

Does cutting government spending at times of economic recession benefit the economy or harm it? We are constantly inundated with the analogy of how families can't spend more than their income so why should governments be allowed to do it. Let the people decide what to do with their own money and the magical confidence fairy will sprinkle fairy dust on us all resulting in never before seen economic expansion for all.

The International Monetary Fund has just released a study that says NO! - Austerity at times of recession is bad and makes things worse.

Austerity is costing UK an extra £76bn, says IMF

George Osborne's drastic deficit-cutting programme will have sucked £76bn more out of the economy than he expected by 2015, according to estimates from the International Monetary Fund of the price of austerity.

Christine Lagarde, the IMF's managing director, last week caused consternation among governments that have embarked on controversial spending cuts by arguing that the impact on economic growth may be greater than previously thought.

The independent Office for Budget Responsibility implicitly used a "fiscal multiplier" of 0.5 to estimate the impact of the coalition's tax rises and spending cuts on the economy. That meant each pound of cuts was expected to reduce economic output by 50p. However, after examining the records of many countries that have embraced austerity since the financial crisis, the IMF reckons the true multiplier is 0.9-1.7.

This multiplicative factor of more than 1 is something that Keynesian economists like Paul Krugman have been shouting about for the past four years but the failure of the US government to implement any such stimulative measures after the small one in 2009 is just another indicator of how conservative on economic matters the present Administration really is.

Krugman in the NYTimes on Oct 13, 2012

As Portes emphasizes, back in 2010, as advanced economies “pivoted” to austerity despite protests from yours truly and others, there were really not two but three positions about the relevant macroeconomics. It wasn’t just a contrast between the wishful thinking of the expansionary austerity types and those who didn’t buy it. There was also a distinction between those who looked at the historical record and concluded that fiscal contraction would have only modest contractionary effects, and those — including Martin Wolf, Wren-Lewis, Brad DeLong, and me — who argued that historical experience from countries that were not up against the zero lower bound, had flexible exchange rates, and were pursuing austerity amidst a strong global economy was likely to greatly understate the effects of austerity in the current environment. Our position was, if you like, that times like this are different.

Presently we have a candidate who wants to double down on austerity plans by cutting all aspects of the federal government except for the DoD and a President who appears to be unwilling to listen to the economists who have been proven correct over the past four years.

Governments do change but I think it is highly unlikely that the rather moderate gentleman presently residing in the White House would be able to, or even wish to, implement the stimulative spending that is being advocated by the IMF and various Keynesian economists around the world.

Of course, if Romney wins in November and over the following four years the economy fails to expand at the rate he promises, it will all be the fault of the Dems. :roll: One thing you can count on with Republicans, they never accept the blame for their failures.

Neomalthusian · Oct 15, 2012

Somerville said:
This is the core of the present debate, not only in the US but in most of the developed world.

Does cutting government spending at times of economic recession benefit the economy or harm it? We are constantly inundated with the analogy of how families can't spend more than their income so why should governments be allowed to do it. Let the people decide what to do with their own money and the magical confidence fairy will sprinkle fairy dust on us all resulting in never before seen economic expansion for all.

Your sarcasm implies we should not let the people decide what to do with their own money.

Born Free · Oct 15, 2012

Somerville said:
This is the core of the present debate, not only in the US but in most of the developed world.

Does cutting government spending at times of economic recession benefit the economy or harm it? We are constantly inundated with the analogy of how families can't spend more than their income so why should governments be allowed to do it. Let the people decide what to do with their own money and the magical confidence fairy will sprinkle fairy dust on us all resulting in never before seen economic expansion for all.

The International Monetary Fund has just released a study that says NO! - Austerity at times of recession is bad and makes things worse.

This multiplicative factor of more than 1 is something that Keynesian economists like Paul Krugman have been shouting about for the past four years but the failure of the US government to implement any such stimulative measures after the small one in 2009 is just another indicator of how conservative on economic matters the present Administration really is.

Krugman in the NYTimes on Oct 13, 2012

Presently we have a candidate who wants to double down on austerity plans by cutting all aspects of the federal government except for the DoD and a President who appears to be unwilling to listen to the economists who have been proven correct over the past four years.

Governments do change but I think it is highly unlikely that the rather moderate gentleman presently residing in the White House would be able to, or even wish to, implement the stimulative spending that is being advocated by the IMF and various Keynesian economists around the world.

Of course, if Romney wins in November and over the following four years the economy fails to expand at the rate he promises, it will all be the fault of the Dems. :roll: One thing you can count on with Republicans, they never accept the blame for their failures.

Yeah, lets put this in terms people can understand, and it should also be easy for Keynesian and Krugman. Our debt has been downgraded. That means there is a measured risk of us not being able to pay the money back. There is talk now another downgrade which increases the risk of us paying it back. Now like any household when you have to much debt the lender finds the risk to high for you to be able to pay it back, no lender will lend you more money. These are facts.

Liberals think there is no end to the money supply, thus for them borrowing and spending is not a problem. Further liberals feel nothing for future generations that have to pay it back as long as it's not them. In other words, liberals have no moral standing of how devastating passing down trillions of debt to future generations. This will lower their standard of living to pay debt rather than that money going to advance their own standard of living. Combine all this and it points to liberals think there is no end of the money supply, they could care less who has to pay it back, and could care less how it effects their lives. All combined in a nice greedy package for liberals to live high on the hog on borrowed money.

The moral of the economic story is "live within your means." This is not what many of the European countries have done and now no one wants to lend them another dime for fear of them not being able to pay it back. But the above poster suggest to them, forget all that, just go and borrow more money, don't you know there is no end to the money supply.

Austerity is costing UK an extra £76bn, says IMF

Somerville

Neomalthusian

Born Free

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