Meanwhile, Across The Pond....

On economics blogs this week, the big news has been the latest World Economic Outlook published by the International Monetary Fund (IMF). The heart of the report:

"The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7."

Multipliers? What's that about?

It is a dispute as old as the formal study of economics. Say and certain classical economists contended that government spending will have no effect on the economy as a whole. Government spending will "crowd out" private spending. There is  thus no "multiplier" from government fiscal measures that will improve the economy. In the long run the economy will fix itself.

"In the long run," economist John Maynard Keyenes quipped, "we will all be dead."

In recent years, the dispute has manifested itself in arguments over how big the multiplier is. Some have said, if it exists, the multiplier effect is very small. Not long ago the IMF official position was to that effect.

The new report says, in effect, "we were wrong."

Why is this important? Because the position of the IMF and that of some other powerful commentators has been that countries must reduce debt, even when their economies are experiencing little or no growth. The new insight: contractionary policies contract economies.

Duh.

Economist Kate McKenzie explains here. Australian economist Bill Mitchell explains here. Mitchell summarizes:

"1. The IMF is incompetent not because its staff are stupid but because the staff use the wrong models and operate in a make-believe world.
2. The world economy is enduring on-going stagnation because there is not enough spending.
3. Monetary policy – whether it being normal interest rate management or the aytpical operations such as quantitative easing – will not resolve a situation where the non-government sector is intent on not spending and the government is intent of pursuing fiscal austerity. The obsession that the policy watchers have with “what is the central bank going to do” is revealing but a waste of time.
4. Fiscal policy activism is desperately required and most nations should introduce new stimulus programs, targetted at direct job creation, to kick-start spending in their economies and provide some optimism to the private sector. This will also allow national income growth to occur, which, in turn, underpins the current desire of households and firms to reduce their precarious levels of debt (following the neo-liberal-inspired credit binge)."

Bottom line: now is not  the time to obsess over deficits and balanced budgets. Now is the time to put idle productive capacity to use by government spending.

I have said this before, but of course no one is paying any attention to me. Maybe some will listen to the IMF.

The core issue: "Who benefits and who pays?"

Related process: "blame the victim."

Chorus of the wealthy and the powerful: "There is nothing the government can do to fix the economy and it's all the president's fault."

Go figure.