The International Monetary Fund's Chief Economist Has Second Thoughts. (January 11, 2013)

From time to time the International Monetary Fund (IMF) issues "working papers" The latest one just issued and authored by its chief economist, Olivier Blanchard, together with Daniel Leigh (PhD Johns Hopkins 2004) is entitled Growth Forecast Errors and Fiscal Multipliers is "authorized for distribution by Olivier Blanchard but comes with the following disclaimer:

This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

The abstract written in language Don Watson would appreciate reads:

This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.

Remy Davison in his partially tongue-in-cheek contribution to the January 10, 2013 issue of The Conversation notes that Drs Blanchard and Leigh are admitting that in the drive for austerity in European economies "every dollar that governments cut from their budgets actually reduced economic output by $1.50", and nimbly goes on to explain what economic "multipliers" are all about.

In the process he also takes a swipe as modern Keynesians, "I fully expect the harbingers of austerity doom (Krugman et al ) to come out of the woodwork any minute now, although they have not been returning phone calls since the Eurozone failed to implode, as predicted," however adding, "True, there is clearly a role for governments to intervene to boost demand via deficit spending during periods of recession. That’s long been the Keynesian prescription. But most governments ignore the other half of Keynes’ sage advice: namely, saving fiscal surpluses during periods of prosperity to ensure fiscal stability during recession, even as the public sector borrowing requirement increases."

All that said Dr Davison continues: "financial institutions aren’t investing in anything other than blue chips and A-rated bonds. Global venture capital plunged 33% in 2012, a disastrous result on the back of a weak 2011. By contrast, global M&A [Mergers & Acquisitions] was up in 2012. So businesses aren’t raising seed capital; IPOs don’t happen; innovations go under funded; R&D dries up; prospective products remain vapourware; and workers don’t get hired. There’s your lack of a multiplier effect writ large."

And what are Blanchard, and Leigh's conclusions: What do our results imply about actual multipliers? Our results suggest that actual fiscal multipliers have been larger than forecasters assumed. But what did forecasters assume? Answering this question is not easy, since forecasters use models in which fiscal multipliers are implicit and depend on the composition of the fiscal adjustment and other economic conditions.

And yet Keynesians such as Paul Krugman have had no doubt as to the arrant incompetence of those calculating multipliers well below 1.

Not to worry, David Cameron will continue to push UK austerity while Greece hits 27% unemployment overall and youth unemployment goes well above 50%.