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2016-06-23

The Myth of Austerity and Growth, Noah Smith

The principles of Keynesian fiscal policy -- which have slowly been coming back into vogue -- say that tightening spending is the worst thing you can do in the middle of a recession. 

More generally, it isn’t clear just how austerity is supposed to work its positive magic. The main claim seems to be the rather vague idea that lower budget deficits increase business confidence.

Blanchard has shifted his stance. In a 2013 paper with Daniel Leigh, he showed that the IMF had been consistently wrong in its forecasts of the effects of austerity. 

The more beneficial the IMF predicted that austerity would be, the more incorrect its predictions were!

In 2010, the IMF admitted that its demands exacerbated the pain of South Korea’s financial crisis in the 1990s. 

And in 2016, the Fund released a report questioning whether its entire economic philosophy had major weaknesses.

Noah Smith, Bloomberg 22 June 2016

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