Fucked by the Very Serious People yet again!
Back when austerity was all the rage (and for many of our more "intellectually challenged" politicians it still is), there was serious debate about how much damage a policy of austerity could cause to an economy already in recession. The Very Serious People maintained that it was important to "get our fiscal house in order," and to cut, cut, cut, or... BOND VIGILANTES... and also HYPERINFLATION!!1!!1!
This cutting, in turn, would lead to a new era of growth and prosperity. Because we all know that cutting taxes increases revenue, right? So cutting government spending in a recession will cause unlimited GDP growth.
Others, like economist Paul Krugman, argued that the act of cutting government spending during a recession would only make things worse. "Tut, tut," said the Very Serious People. "We must tighten our belts."
So how's that workin' out? Not to fucking well according to the IMF...
With many economies in fiscal consolidation mode, a debate has been raging about the size of fiscal multipliers. The smaller the multipliers, the less costly the fiscal consolidation. At the same time, activity has disappointed in a number of economies undertaking fiscal consolidation. So a natural question is whether the negative short-term effects of fiscal cutbacks have been larger than expected because fiscal multipliers were underestimated.So what is a fiscal multiplier you ask? Let's see what Wikipedia has to say.
In economics, the fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it... When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output (and hence the aggregate income that it generates) that is a multiple of the initial change.Conversely, the multiplier can operate in the negative. This happens when the government cuts spending instead of increasing it. The multiplier amplifies the cut through the economy making a $1 cause potentially more that $1 worth of contraction. How much more?
The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.So that $1 can now cost somewhere between $0.90 and $1.70. That's a really bad investment.
So cutting government spending is a pathway to growth exactly how?
We should be spending like drunken sailors on shore leave. Interest rates are 0% and millions are out of work. What the fuck are we doing???
How's that austerity plan looking now?