7 ms·

IMF Chief Economist apologizes for being wrong on austerity

69 points by martythemaniak 14y ago

Mooby 14y ago
That's how science goes: a phenomenon is observe, an hypothesis is formulated, and then it is tested. As it isn't possible to test economic policies on countries, economy often deals with hypothetical models whose limits aren't tested.
iwwr 14y ago
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 14y ago
  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 14y ago
    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.
  - iwwr 14y ago
    Sorry for taking you slightly out of context: "The US is not comparable to any EZ country. We have our own currency" Qualitatively, I would see no difference between the US monetizing debt (and devaluing the value thereof) or something like Greece switching to a new currency which they can print (and devaluing the value thereof). Of course, the amount of devaluation (or default) Greece has to do is much greater. But in either case, some debtors are getting stiffed Strictly, Greece has no money to pay back debtors, let alone fulfill their social obligations. But even the US obligations: debt + social security + medicare/medicaid etc. are now at an unsustainable level.
  - dmix 14y ago
    The comparison between states of a country and countries in europe is in no way as straight forward. The marcoeconomics is way more complicated when you're talking about highly varied countries, each with their own governments. Besides the eurozone is already trying to adopt a central bank style system: http://www.nytimes.com/2012/12/14/business/global/eu-leaders-hail-accord-on-banking-supervision.html?_r=0 http://www.nytimes.com/2012/12/14/business/global/eu-leaders...
- brc 14y ago
  Anything that can't go on, won't.
- slurry 14y ago
  > Taking in more debt to pay for old debt is not sustainable. Of course it is. Rolling over debt securities is everyday practice for both governments and private companies. > In no way can western states sustain the entirety of their assumed obligations (to bond holders, social beneficiaries and special interest). That depends on what kind of economic growth we have going forward. Your statement is certainly true if countries keep auteritizing themselves into deflationary death spirals. It is probably true if countries keep relying on upper-income tax breaks and labor market "liberalization" for growth - arguably worked 30 years ago, but returns on that strategy seem to be diminishing. It is not necessarily true under all circumstances. > People are getting stiffed on old debt, it's only a matter of who, how much and how soon. It's generally been the case that inflation + economic growth have made old debts shrink as % of GDP. When both of those are negative, debt-holders make a lot of real money, but risk of default goes way up.
  - iwwr 14y ago
    The trick is growing the debt slower or at the same rate than the economy. But political incentives accelerate debt acquisition when the consequences are not going to hit for a couple of mandates. It's surprising that governments have not been more profligate than they were. But eventually, someone's going to be in charge when the bills come due. As for the austerity 'death spiral', we can have some sympathy for those social beneficiaries being promised payments. Bond contracts weigh heavier than political commitments (once defaulted, people stop buying debt titles, but once lied to people keep voting).
fennecfoxen 14y ago
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 14y ago
  You must have an interesting definition of "improve".
  - fennecfoxen 14y ago
    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 14y ago
      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).
cantastoria 14y ago
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 14y ago
  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.)
deleted 14y ago
[deleted]
natural219 14y ago
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 (coughrepublicanscough) 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_crisis http://en.wikipedia.org/wiki/United_States_debt-ceiling_cris... [2] http://krugman.blogs.nytimes.com/ http://krugman.blogs.nytimes.com/
- lyudmil 14y ago
  Completely agree. If Paul Krugman isn't enough to sway people, Joseph Stiglitz, another Nobel laureate, has echoed his analysis. So has Dean Baker, who is the first economist to my knowledge to predict the housing bubble and the resulting crisis. Basically, this was easy to see and well-known to economists that aren't neo-liberal demagogs.
  - joslin01 14y ago
    About the entire Austrian economics school predicted the housing bubble. Peter Schiff is famous for getting blasted on TV about it. Krugman, on the other hand, was calling for another bubble like the housing bubble: http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?scp=4&sq=krugman%20mcculley%20bubble&st=cse http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip... I find it funny when Keynesians talk about bubbles. What do you think happens when you set interest rates absurdly low? You could make the argument it stimulates the economy, sure, but at what cost?
    - lyudmil 14y ago
      I don't think I follow. Isn't the idea that you weigh the cost of doing so with the cost of a prolonged recession? I have a general ignorance of exactly what Keynesian economics actually means, but from what I gather, it's not one thing.
bcoates 14y ago
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.
tokenizer 14y ago
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-economic-return-of-iceland-has-proved-that-the-joke-was-on-us-3327164.html?ftcamp=crm/email/20121219/nbe/AlphavilleHongKong/product http://www.independent.ie/business/irish/dan-white-the-econo...
- waterlesscloud 14y ago
  I recently came across this blog post from an Icelander that paints a more complicated picture of the Iceland financial story. Long, but worth a read for a different perspective. http://studiotendra.com/2012/12/29/what-is-actually-going-on-in-iceland/ http://studiotendra.com/2012/12/29/what-is-actually-going-on...
  - tokenizer 14y ago
    Interesting. I've heard of the Icesave lawsuits, but this paints a much more interesting picture. Thanks.
- InclinedPlane 14y ago
  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.
  - tokenizer 14y ago
    So you'e saying this approach wouldn't have worked? Too bad a larger country didn't try. You're also neglecting the fact that, while Iceland is unique, they had unique challenges that other nations wouldn't, like importing a lot of stuff. I'd like to see some explanation as to why this wouldn't work with a larger nation and not simply, because.
wallflower 14y ago
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 14y ago
  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.
- orangecat 14y ago
  savage cuts in social programs and public sector jobs and wages Yet somehow per-capita government spending keeps going up: http://www.usgovernmentspending.com/spending_chart_1990_2017USd_13s1li111mcn_F0t http://www.usgovernmentspending.com/spending_chart_1990_2017....
waterlesscloud 14y ago
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/RomerandRomerAERJune2010.pdf http://emlab.berkeley.edu/~dromer/papers/RomerandRomerAERJun...
beedogs 14y ago
Why do we put incompetent people in charge of things like this?
- hostyle 14y ago
  dishonesty is part and parcel of the trade in banking and politics. competent people tend to stay away from dishonesty.
pash 14y ago
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.
TwoBit 14y ago
WTF. I took Econ 101 and 102 and it was plainly obvious. I wonder if America's conservatives are starting to influence European thinking.
dnunes 14y ago
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.

Mooby 14y ago

That's how science goes: a phenomenon is observe, an hypothesis is formulated, and then it is tested. As it isn't possible to test economic policies on countries, economy often deals with hypothetical models whose limits aren't tested.

iwwr 14y ago

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 14y ago
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 14y ago
  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.
- iwwr 14y ago
  Sorry for taking you slightly out of context: "The US is not comparable to any EZ country. We have our own currency" Qualitatively, I would see no difference between the US monetizing debt (and devaluing the value thereof) or something like Greece switching to a new currency which they can print (and devaluing the value thereof). Of course, the amount of devaluation (or default) Greece has to do is much greater. But in either case, some debtors are getting stiffed Strictly, Greece has no money to pay back debtors, let alone fulfill their social obligations. But even the US obligations: debt + social security + medicare/medicaid etc. are now at an unsustainable level.
- dmix 14y ago
  The comparison between states of a country and countries in europe is in no way as straight forward. The marcoeconomics is way more complicated when you're talking about highly varied countries, each with their own governments. Besides the eurozone is already trying to adopt a central bank style system: http://www.nytimes.com/2012/12/14/business/global/eu-leaders-hail-accord-on-banking-supervision.html?_r=0 http://www.nytimes.com/2012/12/14/business/global/eu-leaders...
brc 14y ago
Anything that can't go on, won't.
slurry 14y ago
> Taking in more debt to pay for old debt is not sustainable. Of course it is. Rolling over debt securities is everyday practice for both governments and private companies. > In no way can western states sustain the entirety of their assumed obligations (to bond holders, social beneficiaries and special interest). That depends on what kind of economic growth we have going forward. Your statement is certainly true if countries keep auteritizing themselves into deflationary death spirals. It is probably true if countries keep relying on upper-income tax breaks and labor market "liberalization" for growth - arguably worked 30 years ago, but returns on that strategy seem to be diminishing. It is not necessarily true under all circumstances. > People are getting stiffed on old debt, it's only a matter of who, how much and how soon. It's generally been the case that inflation + economic growth have made old debts shrink as % of GDP. When both of those are negative, debt-holders make a lot of real money, but risk of default goes way up.
- iwwr 14y ago
  The trick is growing the debt slower or at the same rate than the economy. But political incentives accelerate debt acquisition when the consequences are not going to hit for a couple of mandates. It's surprising that governments have not been more profligate than they were. But eventually, someone's going to be in charge when the bills come due. As for the austerity 'death spiral', we can have some sympathy for those social beneficiaries being promised payments. Bond contracts weigh heavier than political commitments (once defaulted, people stop buying debt titles, but once lied to people keep voting).

fennecfoxen 14y ago

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 14y ago
You must have an interesting definition of "improve".
- fennecfoxen 14y ago
  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 14y ago
    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).

cantastoria 14y ago

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 14y ago
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.)

deleted 14y ago

[deleted]

natural219 14y ago

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 (coughrepublicanscough) 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_crisis http://en.wikipedia.org/wiki/United_States_debt-ceiling_cris... [2] http://krugman.blogs.nytimes.com/ http://krugman.blogs.nytimes.com/

lyudmil 14y ago
Completely agree. If Paul Krugman isn't enough to sway people, Joseph Stiglitz, another Nobel laureate, has echoed his analysis. So has Dean Baker, who is the first economist to my knowledge to predict the housing bubble and the resulting crisis. Basically, this was easy to see and well-known to economists that aren't neo-liberal demagogs.
- joslin01 14y ago
  About the entire Austrian economics school predicted the housing bubble. Peter Schiff is famous for getting blasted on TV about it. Krugman, on the other hand, was calling for another bubble like the housing bubble: http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?scp=4&sq=krugman%20mcculley%20bubble&st=cse http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip... I find it funny when Keynesians talk about bubbles. What do you think happens when you set interest rates absurdly low? You could make the argument it stimulates the economy, sure, but at what cost?
  - lyudmil 14y ago
    I don't think I follow. Isn't the idea that you weigh the cost of doing so with the cost of a prolonged recession? I have a general ignorance of exactly what Keynesian economics actually means, but from what I gather, it's not one thing.

bcoates 14y ago

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.

tokenizer 14y ago

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

waterlesscloud 14y ago
I recently came across this blog post from an Icelander that paints a more complicated picture of the Iceland financial story. Long, but worth a read for a different perspective. http://studiotendra.com/2012/12/29/what-is-actually-going-on-in-iceland/ http://studiotendra.com/2012/12/29/what-is-actually-going-on...
- tokenizer 14y ago
  Interesting. I've heard of the Icesave lawsuits, but this paints a much more interesting picture. Thanks.
InclinedPlane 14y ago
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.
- tokenizer 14y ago
  So you'e saying this approach wouldn't have worked? Too bad a larger country didn't try. You're also neglecting the fact that, while Iceland is unique, they had unique challenges that other nations wouldn't, like importing a lot of stuff. I'd like to see some explanation as to why this wouldn't work with a larger nation and not simply, because.

wallflower 14y ago

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 14y ago
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.
orangecat 14y ago
savage cuts in social programs and public sector jobs and wages Yet somehow per-capita government spending keeps going up: http://www.usgovernmentspending.com/spending_chart_1990_2017USd_13s1li111mcn_F0t http://www.usgovernmentspending.com/spending_chart_1990_2017....

waterlesscloud 14y ago

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/RomerandRomerAERJune2010.pdf http://emlab.berkeley.edu/~dromer/papers/RomerandRomerAERJun...

beedogs 14y ago

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

hostyle 14y ago
dishonesty is part and parcel of the trade in banking and politics. competent people tend to stay away from dishonesty.

pash 14y ago

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.

TwoBit 14y ago

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

dnunes 14y ago

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.