Sunday, October 14, 2012

Not Geology: IMF, Austerity and Recovery

A major shift in thinking at the IMF (International Monetary Fund) has triggered a fair bit of discussion amongst economists. This post is simply reflective of my efforts to get my geologic wired brain around to understanding the implications of the IMF change.

The IMF released an assessment of the World Economic Outlook imf./weo/2012 this week that including a major shift in thinking regarding multipliers in relationship to budget tightening. The "multiplier" measures the reduction in output resulting from a given reduction in the budget. A multiplier of 1 means that a reduction in the budget deficit of 1% of GDP reduces GDP by 1%. In previous reports the IMF had used multipliers of approximately 0.5. Typical multiplier impacts of budget tightening have been on the order of 0.5 over the past three decades. The IMF is now saying that the multiplier should be greater than 1 due to the particular economic conditions we are in. This is a big admittance by the IMF and is why a few economists have been feeling a bit smug: Krugman for example smuggish-thoughts-self-indulgent. The multiplier is very important to IMF policy because of the impact of budget cutting on the GDP. With a multiplier approaching 1 or greater budget cutting will hurt a country's GDP severely.

I have been following how the UK economy has been doing as well as other EU countries. While the UK is in the EU it has kept its own currency, hence its economy can be viewed somewhat separately than the other EU countries and particularly the periphery EUs (Greece, Spain, Ireland, Portugal and to some extent Italy).

In 2010 Great Britain elected a Conservative led coalition government.  The new government implemented a significant amount of budget tightening. Its worth considering how the recovery has progressed in Great Britain since the austerity measures were introduced.

As can be seen four years on, the UK GDP is still 4% below the 2008 level while the US GDP has recovered albeit slowly and surpassed the 2008 level.

Jonathan Portes provides a perspective of the multiplier analyses that has recently been reported by the International Monetary Fund (IMF) and  It is noteworthy that Portes was not in the camp that thought austerity would be as harmful in the UK as it has been.

Though my recent time in Great Britain on this last trip was limited, anecdotal stories did not paint a very good picture of how things are going in the UK economy. In 2010 the UK faced a fork in the political/policy road. Perhaps a different path would have been chosen if policy makers had better understood where those forks would take them. And it will be interesting to see if the IMF rethinking on multipliers filters into our own US dialog on budgets.

Can any of this be linked to the Washington (State) landscape? The simple answer is yes. Big cuts in discretionary spending and infrastructure investment will impact policy and our landscape.                  

No comments: