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The IMF does not say that austerity is too hard, too unfair, causes too much pain in the short term or hits the poor more than the rich. It says simply that austerity may not achieve its goal of reducing debt within a reasonable amount of time.
The technical article makes two observations. The first is that most standard fiscal multipliers used in ordinary forecasting models, including the IMF’s own, is roughly 0.5. That means for each additional dollar or euro in reduced public spending, the economy contracts by 50 cents. This is not a realistic assumption for a time like this. Even intuition tells us that the multiplier must be at least one – simply because the fiscal tightening is not compensated for by lower interest rates. Nobody takes up the slack caused by austerity.
The second claim is that most forecasting models underestimate the multiplier by 0.4 to 1.2. This implies that it must be in a range between 0.9 and 1.7. The estimate for the eurozone periphery is nearer the higher end of this range. So, let us assume that it is 1.5. That means a fiscal adjustment of 3 per cent of gross domestic product would translate into a GDP contraction of 4.5 per cent. This is roughly what Spain needs to do to reach its fiscal target for next year. The multiplier thus tells you what kind of recession Spain can expect. And it tells us that the Spanish government’s forecast of a 0.5 per cent fall in GDP in 2013 is delusional.
What are the policy implications of this analysis? At the very least, one would hope, it would persuade the European authorities to switch from a relentless and ultimately futile pursuit of nominal deficits to a structural target. If they did only this – which I believe is not nearly enough – they would at least end the vicious cycle where governments have to heap one austerity programme on another merely to meet an arbitrary nominal target; one that has no intrinsic rationale other than that it exists.