IMF (Politely) Confirms: Austerity Doesn't Work

Wow, it just doesn’t get much more stark than this. Via Paul Krugman:

Scattergraph of Fiscal Consolidation vs Economic Contraction
‘Contractionary Fiscal Policy Is Contractionary’

On Tuesday, the International Monetary Fund came out with a new report which states, albeit in dry, fact-based bureaucratese, that the world’s governments (particularly though not exclusively those in the Eurozone) ought not continue down the path of fiscal consolidation (debt-reduction), lest they risk slowing the world’s economy even further. The importance of this study can hardly be overstated, since it comes from a supra-national NGO like the IMF and not some politically-interested party within a specific country.

What you are looking at in the above graph is a plotting of the change in GDP of various Eurozone countries against those same countries’ fiscal consolidation. In other words: for each country, how did their attempts (if any) at debt reduction fare in terms of their GDP? The results aren’t pretty (if you’re an Austrian/Austerian debt-scold: virtually every country on the list attempted some form of debt reduction recently. Some had it forced upon them by necessity and/or other countries within the Eurozone (see: Greece, Spain) while others undertook debt reduction on their own initiative based upon political leaders’ belief they were doing the economically prudent thing (read: Britain). But in every case, the larger the fiscal consolidation, the greater the loss of GDP.

This suggests that not only are Keynesian contractionary effects real, but their multipliers and effects may be even greater than previously supposed. And it also suggests the converse, as professor Krugman points out:

So one thing I haven’t seen pointed out is that this directly contradicts current GOP doctrine. To the extent that the GOP has a theory of recession-fighting…it was embodied in the Joint Economic Committee manifesto “Spend Less, Owe Less, Grow the Economy,” which declared that

In the short term, fiscal consolidation programs that rely predominately or entirely on spending reductions have expansionary “non-Keynesian” effects that may offset the contractionary Keynesian reduction in aggregate demand.

In some cases, “non-Keynesian” effects may be strong enough to make fiscal consolidation programs expansionary in the short term.

As Krugman concludes after plotting the above graph: “tell that to the Greeks.” Yet another dose of deficit-cutting fiscal austerity is nevertheless exactly what Republicans in America like Paul Ryan and Mitt Romney would have us do here, despite the fact that, as Krugman and the IMF show conclusively, it’s the fiscal equivalent of prescribing leeches for illness.

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