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 austeritys effects at the start. By the end of the campaign, theyre better at it, the paper saysyet, 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 IMFs 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.
Economists badly misjudged this because they used fiscal multipliers that worked during normal times. These past few years, of course, have been anything but normal. Here, a graph that shows how initial forecasts fared:
Put another way, cutting a governments 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 theres no reason to expect that he cant do it again. But, oh, theres also a once-in-a-lifetime storm raging all around.
In a nation, cutting a governments budget can, in turn, limit consumer spending and confidencekey components of any developed economy. If youre 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. Youre in the bargain-bin basement, shopping at Sears, not Macys. Certainly not at Saks.
What about the latest Apple gadget that will put you back several hundreds dollars? Put off for another year or two.
Or three or four. Or
well, no one seems really sure how long.
