In an important new study, Olivier Blanchard, the Chief Economist at the International Monetary Fund (IMF), has just admitted that having respected and accepted the advice of conservative economists has turned out to be a blunder.This has cost the world’s advanced economies dearly, and must be reversed if the world is to avoid an economic tailspin.
The basic debate among economists has been over Keynes’s “multiplier” – the size of the stimulus to the economy that’s generated by increasing government spending during flat or declining economic times.
In other words: this debate is over whether or not adding government spending during a downturn helps an economy turn up again into growth and surpluses, or whether it instead mainly just adds to the government debt that (according to conservative economists) was the result of too much spending, and that (also according to conservative economists) largely caused the existing “recession.”
Keynes said that the “multiplier” effect of increased government spending is sufficiently large to more-than-counteract the negative economic effect of adding to the government’s debt during an economic downturn. Conservative economists assume instead that the multiplier is too small to counteract that negative effect.
The new “IMF Working Paper,” titled “Growth Forecast Errors and Fiscal Multipliers,” prepared by Blanchard and Daniel Leigh of their Research Department, reports that whereas the IMF had been accepting conservative economists’ estimates that the multiplier was “about 0.5” per cent growth, the “actual multipliers were substantially above 1 early in the crisis,” which was the period when the IMF was recommending and pursuing “fiscal consolidation,” which is called in the United States “austerity.”
In other words, the policy recommended by the Republican Party’s economists, and which has actually been tried especially in Europe, has failed miserably.
Here are some of the things the IMF study reports:
“Fiscal multipliers can exceed 3. … Based on data for 27 economies during the 1930s, … Alumnia and others (2010) have concluded that fiscal multipliers were about 1.6.” The IMF report referred to “our findings that short-term fiscal multipliers have been larger than expected” during the current crisis, and they wondered whether this underestimation by economists was unusual.
“How special is the crisis period? … For the set of two-year intervals during the precrisis decade (1997-2008), we find … the estimate … is near zero,” which was even farther off the empirically demonstrated mark. They wondered why “fiscal consolidation (or as Americans say, “austerity”) flops. “We find that forecasters significantly underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation.”
According to Keynesian theory (which got us out of the Great Depression), “growth disappointments should be larger in economies that planned greater fiscal cutbacks. This is what we found” in the post-2008 period.
The report’s “Abstract” said: “We find that, in advanced economies, stronger planned fiscal consolidation [the ‘austerity’ that is being pushed by John Boehner, Mitch McConnell, and other Republicans] has been associated with lower growth than expected. … Fiscal multipliers were substantially higher than implicitly assumed by forecasters.”
Here in the U.S., a similar recent study was done by the research arm of the U.S. Congress. That study covered only the U.S. economy, and it focused like a laser on only U.S. economic history. The specific question it examined was whether economic growth has been spurred in the United States by cutting taxes for the rich and introducing austerity for the nation-as-a-whole by the Federal Government, or whether such economic policies have failed to generate economic growth in this country.
It found that they have failed.
Since the study was American, and the standard version of anti-Keynesianism in this country has been “supply-side economics,” which combines austerity with top-end tax-cuts, this study dealt with only the peculiarly American form of conservative anti-Keynesian economic theory. However, its findings were entirely consistent with the recent IMF global findings.
On 17 September 2012, which was a timely moment during the national debate and congressional negotiations over the “fiscal cliff,” thinkprogress.org bannered “New Study Finds Tax Cuts For The Rich Cause Income Inequality, Not Economic Growth,” and reported that, “According to a new report by the Congressional Research Service, cutting taxes for the wealthiest does not cause economic growth, despite constant conservative claims that it will. Instead, tax cuts for the rich merely exacerbate income inequality.”
This finding, by the Congress’s own research service, essentially destroyed the foundation-stone of the Republican Party’s economic arguments. The entire Republican argument against Obama’s proposal to hike top-end ($250,000+) taxes was decimated by these findings.
Few newsmedia published or linked to this stunning news story; it was too devastating to the Republican campaign. Democrats tried to get it into circulation, but pretty much failed. Thinkprogress linked to the study, which was titled “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.”
Months of silence on this shattering news were finally broken a few months later, late enough so that it couldn’t affect the election-results. Then, on November 2nd, The New York Times headlined, with perhaps intentional dullness (so as to help assure that the matter would stay out of the political debate), “Nonpartisan Tax Report Withdrawn After G.O.P. Protest.”
Jonathan Weisman reported there the actually historic news, that, “The Congressional Research Service [which he failed to note was the most respected nonpartisan research organisation concerning legislation] has withdrawn an economic report that found no correlation between top tax rates and economic growth, … after Senate Republicans raised concerns about the paper’s findings,” findings that contradicted “a central tenet of conservative economic theory,” which was supply-side economics: the belief that top-end tax-cuts trickle down to everybody and so produce a growing, expanding, economy. (Weisman deceived there: Calling supply-side economics “economic theory” or a “central tenet” of any, would be taken as an insult by most economists, since it’s not, and it was always considered marginal, at best, among academic economists. Calling it “conservative economic theory” was laughable, since it was actually just Republican economic theory – the Republican economic theory – not respectable enough to be broadly believed even by conservative academic economists.)
“The decision [by CRS], made in late September against the advice of the agency’s economic team leadership, drew almost no notice at the time.” Buried in this obscurantistly-written, and way understated-headlined, news story, from the ever-subtly Republican-slanted NYT, was the crucial: “Congressional aides and outside economists said they were not aware of previous efforts to discredit a study from the research service.”
In other words (to decode here): This action by Senate Republicans was a historically unprecedented deep-sixing, by a political Party, of a research report by the official research arm of the United States Congress. It was terrifying. It was Orwellian.
After more than two hundred years, the research service of the U.S. Congress was zapped regarding a scientific finding that a political Party had blocked from even being issued. The headline for this story should instead have been “In Historically Unprecedented Move, Congressional Research Service Finding Is Squelched.” But that would have attracted attention to the matter, so it wasn’t done.
The reason that the CRS report was squelched wasn’t reported by the Times. This reason was that without supply-side theory, the entire Republican economic program had no argument. The conservative owners of The New York Times wouldn’t permit reporting this key historical fact.
But they did permit reporting most of the facts that would enable an intelligent and knowledgeable reader to figure it out on his own. (Democrats had been trying to circulate this study. That’s why, on September 17th, thinkprogress.org had headlined about it, “New Study Finds Tax Cuts For The Rich Cause Income Inequality, Not Economic Growth.” But then, the study just fell down the memory-hole.)
In order to become an editor at that newspaper, one needed to be acceptable to the closeted Republicans who controlled the NYT corporation.
Since this news report was veiled, it had no real political impact, just as was intended. (The NYT Corp. could now claim that they had covered this news, even when they really hadn’t, actually.)
At the end of the NYT’s news report was the article’s final take-away on the matter: After presenting Republicans’ complaints that the study was biased, the article itself said that the study’s writer “has contributed at least $5,000 this election cycle,” all to Democrats.
Why was this reported? Because it was the Republican Party’s talking-point, no other reason. It was pure propaganda, presented by the NYT as if it were a legitimate element of this particular news-story, when it was actually nothing more than what the Republican Party had communicated to the reporter that they wanted the public to be made to know. But there was no law saying that federal researchers and other employees were prohibited from donating to political campaigns.
Should a $5,000 donation by the article’s editor have been reported in the article, if it had happened? Of course not. Should federal employees, or members of the press, not be permitted to vote? Of course not. This fact was reported by The New York Times only because The New York Times Corporation was a Republican propaganda operation, no other reason.
Republicans thought that corporations were people, but evidently they thought that government employees were not people, or at least shouldn’t be allowed to donate to political campaigns. Buried near the end of this propaganda-article was the study’s finding that “top tax rate reductions appear to be associated with the increasing concentration at the top of the income distribution.” That crucial finding, too, would have made a more striking headline than the miserable one that the newspaper wrote and published.
On November 2nd, Nick Wing and Ryan Grim headlined at huffingtonpost “Congressional Research Service Report on Tax Cuts for Wealthy Suppressed by GOP,” and provided an honest news report regarding this matter, which had been suppressed by the GOP and then deep-sixed by the NYT.
They also presented the study’s key quotes, such as “Reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”
They also linked directly to the suppressed study. Its author was Thomas L. Hungerford, Specialist in Public Finance. Hungerford told huffingtonpost, “CRS reports go through many layers of review before they’re issued.” Moreover, “Hungerford said that he had never experienced suppression like this before.”
Basically, this was like when in the George W. Bush White House scientific studies were withdrawn or rewritten because they didn’t say what Republicans (and their oil company financiers) wanted to be said about global warming.
To boil all this down: austerity during a sluggish economy causes the economy to contract, and that contraction causes people’s incomes and spending to decline, and that causes taxes into the Federal Government to decline, and that decline in tax-income to the government causes its deficits to soar, and that causes the government’s debt to soar.
The time for austerity is when the economy is booming, which was what Bill Clinton did during boom-times when he increased top-end taxes and reduced government spending. But we’re not in those times now. In order to restore that, we would need to do what FDR did starting in 1937, and which worked during the last Great Depression: massive federal spending increases on infrastructure and public welfare, precisely what the Republican Party fights against, and what our Republican-Democratic President Barack Obama refuses to fight for.
Democratic economics has outperformed Republican economics consistently since at least 1910, if not even earlier. It would do so again, if only we tried it. But this President won’t fight for it, if he even believes it himself, which he seems not to.
Investigative historian Eric Zuesse is the author, most recently, of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.
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