WAKING UP TO REALITY [davidmcwilliams]
October 16, 2012 Leave a comment
“When faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”
This brilliant quote from economist JK Galbraith just about sums up why individuals and organisations tend to stick to plan A when the evidence suggests that Plan A isn’t working. No one likes to be proved wrong but, ultimately, the worst thing we can do when our world view turns out to be flawed is stick to it. Yet this is precisely what many of us do.
Given this general observation, it was fascinating to see the IMF conclude last week, with its influential world economic outlook, that it might have got its basic economics wrong. If not quite apologising for leading half of Europe up the economic garden path, the IMF has at least admitted that what we have been arguing for years in this column is right. For the first time, the IMF conceded that austerity doesn’t work and, not only does it not work, but it is counter-productive.
The implications of this concession for the continuation of the ‘austerity at all costs’ policy are enormous – and may prove to be the first chinks in the armour of the troika.
Christine Lagarde’s IMF noted in its global outlook that the world economy has slowed down more rapidly than it had expected, and its experts asked themselves why had they got it so wrong yet again. Given that the main pillars of Irish economic forecasting – the Department of Finance, the Central Bank and the government’s own fiscal advisory thingy – all subscribe to the IMF’s original view of how the economy works, this volte face by the IMF is not merely academic.
So the IMF asked itself what was going wrong with its economic models which, yet again, got the projections so wrong. Remember, this is the organisation, along with the ones mentioned above, that didn’t foresee the greatest crash in recent economic history.
The nub of the issue is what economists call the size of the fiscal multiplier. This concept relates to how much a cut in government spending or increase in taxes affects the rest of the economy. If it doesn’t have much impact, this would be a small multiplier and mean that a country could cut government spending and not be affected so much because the private sector would take up the slack.