IMF economists admit — austerity hasn’t delivered!

6 June, 2016 at 16:58 | Posted in Economics | 2 Comments

Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand — and thus worsen employment and unemployment.The notion that fiscal consolidations can be expansionary (that is, raise output and employment), in part by raising private sector confidence and investment, has been championed by, among others, Harvard economist Alberto Alesina in the academic world and by former European Central Bank President Jean-Claude Trichet in the policy arena. austerity-meme-sequester-thisHowever, in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini measure of income inequality.

Jonathan Ostry, Prakash Loungani, and David Furceri



  1. The linked article, Neoliberalism: Oversold, argues that Neoliberalism has aimed at growth, but inexplicably missed the mark by its adoption of austerity as a means of forcing institutional reforms. And, alas and alack, neoliberal austerity has “costs” in increased inequality, and increased inequality appears to have choked off the hope of growth.
    Perhaps neoliberalism has always aimed at upward redistribution of income, and growth was just a fraud.

  2. This article can be put into perspective if we contrast it with what the MIT’s Stanley Fischer and the IMF used to say, for example, in response to the Asian Financial Crisis:

    “Indeed, the reluctance to tighten interest rates in a determined way at the beginning has been one of the factors perpetuating the crisis. Higher interest rates should also encourage the corporate sector to restructure its financing away”

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