This is significant (and thanks to Gustav Horn for sharing this on Facebook)! On Social Europe Journal we have been analysing the failure of austerity from all kinds of angles for years. And towards the end of 2012, some of the traditionally austerity supporting institutions seemed to get doubts and reviewed their approach. And guess what, it looks like the Washington based IMF has issued a pretty clear ‘we were wrong’ note. The Washington Post called the document an ‘amazing mea culpa’:
Consider it a mea culpa submerged in a deep pool of calculus and regression analysis: The International Monetary Fund’s top economist [Olivier Blanchard] today acknowledged that the fund blew its forecasts for Greece and other European economies because it did not fully understand how government austerity efforts would undermine economic growth.
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.
We have recently published an article by Robert Skidelsky examining the merits of economic forecasting and there will be more on this subject next week. The IMF’s admission again shows that economic forecasts should not be treated as reliable predictions of the future. They are useful indicators but are always based on build-in assumptions and theories that might be helpful in some situations but much less so in others.
The big question here is what this means politically. It is nice to talk about the merits of economic forecasting in academic terms but the policies that were (mis-)guided by these forecasts have done real harm. They have destroyed the lives of real people!
The intellectual case for austerity has been disintegrating before our eyes but the politics needs to change too. And given that austerity is the backbone of so many governments’ politics, this will not be easy. It might get really messy this year!