New IMF study suggests that austerity will damage the recovery

[Acanthus]

What everyone who is well versed in economics already knew. This gives us quantifiable evidence and clearly drawn patterns to draw conclusions from.

http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf

 

[Atreus21]

What everyone who is well versed in economics already knew. This gives us quantifiable evidence and clearly drawn patterns to draw conclusions from.

http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf

Could you give a few cliffs?

 

[woolfe9999]

The cliffs are in the first italicized paragraph. The thread title doesn't accurately summarize the findings IMO.

Basically, it concludes:

1. Spending cuts will damage the economy in the short term.
2. Tax increases will damage the economy even more in the short term.
3. The short term damage can be offset to some degree with monetary policy.
4. Spending cuts will grow the economy in the middle to long term.
5. Spending cuts should be delayed until economies recover, but thereafter are a good idea.

- wolf

 

[Moonbeam]

The cliffs are in the first italicized paragraph. The thread title doesn't accurately summarize the findings IMO.

Basically, it concludes:

1. Spending cuts will damage the economy in the short term.
2. Tax increases will damage the economy even more in the short term.
3. The short term damage can be offset to some degree with monetary policy.
4. Spending cuts will grow the economy in the middle to long term.
5. Spending cuts should be delayed until economies recover, but thereafter are a good idea.

- wolf

Would you say this is exactly what Obama has been doing and what the Republicans preach, but never do, would be the opposite?

 

[woolfe9999]

Would you say this is exactly what Obama has been doing and what the Republicans preach, but never do, would be the opposite?

The republicans preach all spending cuts and always cutting taxes, all the time, no matter the economic context. What they actually do is try to cut taxes and never really try to cut spending.

So far as Obama is concerned, he's right to not want big spending cuts now. It remains to be seen whether he truly gets behind them when the time is right. I have my doubts.

- wolf

 

[Exterous]

Would you say this is exactly what Obama has been doing and what the Republicans preach, but never do, would be the opposite?

Well, the Republicans are trying to get tax cuts so there is that.

Unfortunately I have no faith in either party to cut spending when the economy recovers

 

[zsdersw]

The republicans preach all spending cuts and always cutting taxes, all the time, no matter the economic context. What they actually do is try to cut taxes and never really try to cut spending.

Indeed.

And this won't change even if the Tea Party gets elected everyone it favors now and in 2012.

 

[Atreus21]

Indeed.

And this won't change even if the Tea Party gets elected everyone it favors now and in 2012.

No, but goddamn it, it'll be good for my ego.

 

[ShawnD1]

The cliffs are in the first italicized paragraph. The thread title doesn't accurately summarize the findings IMO.

Basically, it concludes:

1. Spending cuts will damage the economy in the short term.
2. Tax increases will damage the economy even more in the short term.
3. The short term damage can be offset to some degree with monetary policy.
4. Spending cuts will grow the economy in the middle to long term.
5. Spending cuts should be delayed until economies recover, but thereafter are a good idea.

- wolf

In other words, they concluded that Keynesian economics works. Is the IMF run by a bunch of first year college students or something?

 

[Throckmorton]

In other words, they concluded that Keynesian economics works. Is the IMF run by a bunch of first year college students or something?

As opposed to internet economists with big epeens they got by reading Ron Paul's website?
/facepalm

 

[daishi5]

In other words, they concluded that Keynesian economics works. Is the IMF run by a bunch of first year college students or something?

They did not conclude Keynesian works. They concluded that spending cuts hurt the economy. If that is true, it does not necessarily imply that more spending will help the economy.

 

[theeedude]

Told you so.

 

[bamacre]

Does the IMF have a decent track record? I'm wondering why I should trust anything they say, regardless of whether or not I agree with them.

 

[matt0611]

Laying off people from unproductive government jobs and cutting down spending of money we don't have would be bad in the short term, who would have thought? :\

 

[Narmer]

The cliffs are in the first italicized paragraph. The thread title doesn't accurately summarize the findings IMO.

Basically, it concludes:

1. Spending cuts will damage the economy in the short term.
2. Tax increases will damage the economy even more in the short term.
3. The short term damage can be offset to some degree with monetary policy.
4. Spending cuts will grow the economy in the middle to long term.
5. Spending cuts should be delayed until economies recover, but thereafter are a good idea.

- wolf

Good. I can live with short term damages if it benefits the economy in the long term. We fucked up. I doubt, should the economy start booming again, that we will ever raise taxes to capture that extra revenue.

 

[woolfe9999]

Does the IMF have a decent track record? I'm wondering why I should trust anything they say, regardless of whether or not I agree with them.

I have no idea. The best approach would be to read the entire paper and consider their methodology. Their conclusions are apparently based on empiricism rather than theory. Specifically, they examined the historical effects of various taxation and spending policies on advanced economies and have drawn their conclusions from that. I'm sure it isn't anywhere near an exact science. However, it's better than trafficking in pure theory which IMO is a waste of time.

I think both the right and the left have takeaways from these findings. One the one hand, their findings do seem to support the Keynsian approach to combatting recession. On the other hand, they conclude that spending cuts will grow the economy in the longer term. They also conclude that tax increases are worse than spending cuts during a recession.

- wolf

 

[dullard]

We've tried major austerity changes in the past. That is what killed the recovery from the first half of the great depression and started the second half of the great depression. We don't have to debate the track record of the IMF, we have cold hard facts from a similar situation not that long ago.

Cutting spending or raising taxes in a recession (or a recovery from one) is very detremental. However, so is out-of-control spending. What we can and should do is to cut our unrealistic long-term promisses (social security for example for the federal government and pensions for state/local governments).

Cutting $1 trillion now will have virtually no long-term benefits and will just destroy our economy's recovery. But cutting $10 trillion (or more) from these impossible long-term promisses will have major long-term benefits and won't harm our recovery.

 

[JSt0rm]

Good. I can live with short term damages if it benefits the economy in the long term. We fucked up. I doubt, should the economy start booming again, that we will ever raise taxes to capture that extra revenue.

They are saying to wait until the economy is better. Don't you work for the government? Kinda weak to say you will take the short term damage when your job is 100% safe.

 

[juiio]

As opposed to internet economists with big epeens they got by reading Ron Paul's website?
/facepalm

The Austrian School is slightly older than that.

 

[JS80]

In other words, they concluded that Keynesian economics works. Is the IMF run by a bunch of first year college students or something?

Keynesian economic theory works when you reduce government spending during boom times. Unfortunately politicians love to use Keynesian economics during recessions, and not during the growth times. At this point I'm tempted to say I'd rather not have to resort to Keynesian economics at all knowing the political process in a Robin Hood democracy.

 

[woolfe9999]

Keynesian economic theory works when you reduce government spending during boom times. Unfortunately politicians love to use Keynesian economics during recessions, and not during the growth times. At this point I'm tempted to say I'd rather not have to resort to Keynesian economics at all knowing the political process in a Robin Hood democracy.

This is absolutely correct. The problem is not the Keynsian approach during a recession. It's our lack of fiscal restraint in the boom times, the result of which is that we enter recessions with a massive deficit curve and massive debt. The theory is that you maintain a balanced budget during boom times. You then can run a reasonable deficit during a recession, which debt gets paid off when the economy improves. However, if you are fiscally irresponsible during the boom times, you end up being caught between a rock and a hard place when a recession hits, which is where we are right now.

- wolf

 

[Pocatello]

Diet and exercise aren't pleasant, in fact it's painful to do both. Cutting back spending by the government isn't easy. People will lose jobs, but mounting debts will cripple this country in the long run. I don't see the Democrats nor the Republicans willing to trim the fat, both are more than happy to borrow and spend on their favorite programs, social welfare, missile defense, new aircraft carriers, new wars, etc.

 

[JS80]

This is absolutely correct. The problem is not the Keynsian approach during a recession. It's our lack of fiscal restraint in the boom times, the result of which is that we enter recessions with a massive deficit curve and massive debt. The theory is that you maintain a balanced budget during boom times. You then can run a reasonable deficit during a recession, which debt gets paid off when the economy improves. However, if you are fiscally irresponsible during the boom times, you end up being caught between a rock and a hard place when a recession hits, which is where we are right now.

- wolf

I will also put up for debate that in the case of a recession caused by a structural change in the economy, that Keynesian methods will not work and is not sustainable. I am currently on the side that it only works during "normal" recessions. I am not convinced propping up asset prices during the most recent crisis was the "right thing to do."

 

[BoberFett]

This is absolutely correct. The problem is not the Keynsian approach during a recession. It's our lack of fiscal restraint in the boom times, the result of which is that we enter recessions with a massive deficit curve and massive debt. The theory is that you maintain a balanced budget during boom times. You then can run a reasonable deficit during a recession, which debt gets paid off when the economy improves. However, if you are fiscally irresponsible during the boom times, you end up being caught between a rock and a hard place when a recession hits, which is where we are right now.

- wolf

:thumbsup:

Our problem is one of having cake and eating it too. We spend too much during booms times and even more during the busts. The federal government is an out-of-control spending machine and needs to be seriously pruned. The OP probably is correct though, that this is not the right time to do it economically. The problem is that once (if?) we get out of this recession, will we take to heart the lessons learned or will short term thinking prevail again, and we do the exact same thing that put us here to begin with? Consider me a pessimist on that issue.

I will also put up for debate that in the case of a recession caused by a structural change in the economy, that Keynesian methods will not work and is not sustainable. I am currently on the side that it only works during "normal" recessions. I am not convinced propping up asset prices during the most recent crisis was the "right thing to do."

:thumbsup:

Also correct, asset devaluation was a correction that had to happen to get back on track. Propping up house prices and failed banks and automakers may only serve to stretch out the correction and set us up for another potential fall.

 

[PeshakJang]

We've tried major austerity changes in the past. That is what killed the recovery from the first half of the great depression and started the second half of the great depression. We don't have to debate the track record of the IMF, we have cold hard facts from a similar situation not that long ago.
.

While the economy and government policies of the 30's were a lot different than they are today, the two main reasons for the second recession are pretty well understood. It was due to a rise in real labor costs, due to forced unionization policies and government corporate tax regulations... as well as a decrease in money supply brought on by the central banks' increase in reserve requirements as an effort to prevent inflation. This caused businesses to lay off employees and reduce production, and the money supply to be reduced greatly. Austerity by the government had little, if anything, to do with it.