Source: IMF, Washington Post



A number of folks are looking at the latest IMF paper (here) as a startling admission of the failure of Austerity:

“Consider it a mea culpa submerged in a deep pool of calculus and regression analysis: The International Monetary Fund’s top economist 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.

The new and highly technical paper looks again at the issue of fiscal multipliers – the impact that a rise or fall in government spending or tax collection has on a country’s economic output . . .”

The math is quite simple: Simultaneously choke off government spending and raise taxes, and you crimp the economy reduce job creation and hurt tax revenues — creating an even bigger deficit.

To fix a chronic deficit, you need to make the economy grow faster . . .


An amazing mea culpa from the IMF’s chief economist on austerity
Howard Schneider
Washington Post, January 3, 2013


Category: Economy, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

61 Responses to “IMF Austerity Mea Culpa?”

  1. The IMF reflects a mindset existing with financial elites around the world.

    Math is a very useful tool… generally.

    However its use in economics (especially macro-economics) can lead to a path, frankly, that has been and is used to justify whatever largely emotionally-based biases are held by the economist.

    Where all variables are not… and cannot… be reliably determined any mathematical conclusion should be suspect.

    How about a little common sense!

    Here’s a more local example re the housing collapse:

    Did any of the whizbangs at the banks or the FED ever consider the connection between house prices and rents/wages? And that unless there was some sudden impossible boom in jobs and wages (or inflation)… it was a house-of-cards bound to fall.

    Really unbelievable that this continues. These people are only propagating theories pleasing to self-serving ignorant elites paying their wages.

    Its an elite groupthink.

    And very few of us are in the group.

  2. AHodge says:

    i posted the below on FTs article today and set ccs to my econometric friends
    think is fair to say lagarde is now ignoring him–not easy to fire? and backing away from budget cutting for now

    i heartily agree on Blanchards obfuscation on multipliers
    i cant devote the time to a complete refutation
    Blanchard who i have quizzed on this
    is a complete “rational” expectations devotee
    and thought fiscal expansion could be mostly offset by consumers cutting back
    because in theory they would think
    “i will have to pay for it with taxes eventually”

    otherwise multipliers in principal will ALWAYS be more than 1.0
    the spending generates follow on spending by who sold the good from his new income (also the reverse).
    This why the original “multiplier” concept was NAMED that.
    Note if the fiscal stimulus is govt spending
    that is a direct and immediate GDP boost of 100% or a multiplier of 1
    Thats arithmetic, not high level econometric BS

    conversely if govt cuts back and consumers dont correspondingly spend more, and govts dont cut interest rates in response
    the downside will ALWAYS ALWAYS be more than 1.0
    Blanchards first assumptions were multipliers well under 1.0
    and with his ridiculous exercise in estimatiing precrisis multipliers of other forecasters
    he “finds” they assumed only a 0.5% multiplier
    this is highly unlikely but he could ask them
    when i ran the Globalinsight macro model we typically assumed more than 1.

    the basic modeling problem still is
    the models don’t account for the drag or negatives of a broken or half broken financial system in US and Europe
    I say from personal discussion, he is massively ignorant in this area.
    among other parts of his ridiculous “estimate others multipliers” exercise
    he assumed a two year lag in GDP results for others models
    when as noted earlier, Govt spending boosts GDP by 100% immediately on the GDP arithmetic its part of spending C+I+G+X
    . hint Olivier its the “G”
    this is designed not to fail and not find much multiplier
    ReportAHodge** | January 4 4:53pm | Permalink

  3. Joe Friday says:

    Can we just stamp a big DUH! on the forehead of everybody who advocated this nonsense ?

    Oh, and the Congressional Republicans get permanent ink as they are STILL pushing failed austerity.

  4. AHodge says:

    make that designed to fail of course

  5. DeDude says:

    So simple and yet so hard to understand. We produce approximately 1 trillion of GDP per year per 10 million full time workers. When 10 million people who want full time employment are forced to go without the loss is $ 1 trillion per year AND that loss is permanent. Most austerity measures have huge collateral damage in the form of reduced demand creating unemployment, so all those budget “savings” are poured into a bucket with a hole in it.

    When the economy is in a slump you can indeed spend your way out of the problems (multipliers are big). When the economy is in good shape there are more negative effects of increased public spending and less negative effects of austerity. It is called content dependent rules. The outcome of pouring more liquidity into the economy is completely different depending on whether it is operating close to or way below capacity. Think about pouring more water into a glass that is half empty or a glass that is almost full, same act different outcomes.

  6. Mike in Nola says:

    Recommend Lords of Finance describing how various things worked (or didn’t) in the 1920′s. The world went through a lot of this same thing after WWI. British austerity didn’t work and crushed it’s own working classes and manufacturing; Germany’s inflation away of the debt went too far the other way and destroyed the middle class. As the country with all the gold, currency reserves and manufacturing, even we eventually crashed and burned like China will because all our debtor customers couldn’t afford to buy our stuff any more.

  7. znmeb says:

    The Aust(er)ians will not have their minds changed because of this. Even though we may puke every time we hear the word “spending” coming out of a GOP mouth, in the end we have to clean up our puke all by ourselves.

  8. RightSmart says:

    When this story originally came out in October the data and analysis was criticized with some merit. If you were to remove Greece and especially Greece from the dataset as outliers it loses statistical significance ( Always a good thing to check on when you have such a glaring outlier in a chart.

  9. RightSmart

    You are claiming Greece is an outlier, but you are completely ignoring the premise:

    Namely, the math of choking off government spending and raise taxes, crimps the economy, reduces job creation and hurt tax revenues — thus creating an even bigger deficit.

    Can we convince you to focus on the key here . . . ?

  10. NoKidding says:

    An alternative assessment of the same data would be that the worst lies come from the economies in the worst positions.

    Note the German-Greece pair:
    In whose interest was it to understate ability to lend, and in whose interest was it to overstate ability to pay back?

  11. Lukey says:

    All this does is uncover the dirty little secret that the only thing propping up the developed economies is big governmentism. I’ll ask again, when you are buying sub 2% GDP growth with 5-7% of GDP deficit spending, how many years does it take to spend your way to prosperity?

  12. Smokefoot says:

    The relationship is simple: lower spending+higher taxes -> lower growth, but the math is not: how much lower growth? How much higher growth with higher spending+lower taxes?

    We have seen both cases where the austerity dropped growth enough to result in higher deficits and cases where stimulus didn’t result in enough growth to counteract higher deficits.

  13. jnkowens says:

    The average citizen will not grasp this distinction, because to them government-finance functions just like their household’s finances do, only on a massive scale. Therefore the whole multiplier concept seems to them, counter-intuitive. Stimulus is viewed simply as more debt piled onto the already massive existing debt, and so the opposite of stimulus sounds like the sensible solution.
    Of course to them Michele Bachmann also sounds like the sensible solution…

  14. GetReal1 says:

    What? Austerity does work if governments were ran properly in the first place, i.e. had balanced budgets and saved money during good times in order to spend during bad times. Trying to be austere during a recession when you were deficit spending beforehand will obviously have repercussions. Living within your means sucks, duh. Governments should find other methods to improve their economy, deficit spending is not the answer.

    I’m totally getting disheartened reading folks comments here. I just don’t understand why so many people want their hamburger today even though it will be their children who will be forced to pay for it. Maybe the solution will be just to never borrow money or even tax, just let the government print money as they need. Once people realize how much their money is being devalued, then maybe they’ll demand that politicians do something about it.


    BR: LOL. Its unfortunate that in the real world, we don’t get to do policy analysis by beginning with: Imagine that governments were well run and there were no deficits. In that case, my policy would be . . .

  15. DeDude says:


    Based on what accepted statistical tool are you claiming Greece to be an “outlier”. From the data Greece is an extreme case supporting the general pattern of the rest of the data, not an outlier conflicting with the rest of the data. You cannot simply ignore the most/least supportive data points (calling them outliers) until you worked your way side of p<0.05 that you want to be on. Why not throw away Sweden as an "outlier" if you are going to throw away data points that are set away from the rest?

  16. Smokefoot says:

    Barry said: “Namely, the math of choking off government spending and raise taxes, crimps the economy, reduces job creation and hurt tax revenues — thus creating an even bigger deficit.”

    I would argue that this can’t always be the rule. Large changes can shock the economy, true, but there have been many cases of increased taxes that have not had a noticeable impact on growth. There are even cases of government spending decreasing that have not resulted in slower growth – the aftermath of major wars is usually a time of lower government spending.

    Trying to figure out the multiplier (and why it changes in different circumstances) is a useful thing to do. Even if we end up saying we can’t figure it out that is still useful, since we can tell all the various sides (supply-siders, austerity, massive stimulus) that they don’t really know the result of their policies.

  17. chancypants says:

    The average MMTer will not grasp that infinite growth with finite resources doesn’t work either, because to them gravity and physics don’t apply to governments like it does to households. The typical resolution to governments that rack up massive unpayable debts is to force losses on the loser of a war. How do you resolve them in peace time? Japan is the vanguard of massive first world government debt and they have not found any solutions. Let’s see how Japan does the rest of the decade.

  18. AHodge says:

    similiarly Blanchards ecnonomics group eurozone forecast of slight growth this year is a fantasy
    though not the only one around
    the IMF Financial Stability Group by contrast put out a financial outlook or risks forecast leat year
    that suggested bank and nonbank credit could continue to contract and perhaps accelerate.
    fairly hair raising reading for europe and far more realistic

  19. DeDude says:


    Yes it is a little more complicated than higher/lower of spending/taxes. Taxes can hit the consumer class or the investor class, and that makes a huge difference. Lower taxes for the investor class at a time when they cannot find productive investments, will lead to speculation and bubbles in one or more asset classes. Speculation in commodities will drive prices up and hurt the consumer class (and the economy), speculation in housing right now would probably be helpful (although it would be bad further into the recovery). Cutting taxes on the consumer class will usually give the economy a boast as they spend it, but right after a severe financial crisis they are more likely to use the money to pay down debt or to save it. So after a financial crisis the stimulus will be most effective if it consists of government spending (although some type of spending is a lot more effective than other). Furthermore, the size of any stimulus is also going to influence its success. China responded with a stimulus package that was as big as the predicted loss of demand and they never entered a recession at all. In the US the predicted loss of demand was 2 trillion but we passed only a 0.8 trillion stimulus package (of which half were tax-cuts of little or no value to counter loss of demand). So (as predicted by the competent economists) the US stopped a free fall in its economy, but only slowly began working its way out of the slump.

    Even though multipliers for the same action can be very different dependent on what the situation is, that does not mean we should abandon them all together or say that we don’t know what type of policy is best. We are perfectly well aware of the effects of austerity and stimulus even if this work indicate that the idiots deciding and designing austerity policies failed to use the appropriate multipliers in their models and fraudfully (or should be say grossly incompetently) failed to understand the equivalency of multipliers when you calculate effects of austerity and effects of stimulus.

  20. mad97123 says:

    “To fix a chronic deficit, you need to make the economy grow faster”

    Growth to infinity and beyond, seems like a reasonable expectation. Deficit spending and money printing (and a little technology) should ensure that all the worlds economy grow forever without any natual limits. The bills will never come due in our livetimes, so let’s just keep spending what we don’t have, it’s really just imaginary money at the end of the day.

  21. gman says:

    The folly of “everybody save at once” seemed to me obvious at the time. “Every nation also needs to export more and import less right get their house in order”.

  22. mad97123 says:

    It also strikes me that there is a very circular reference going on here. Deficit spending causes growth, but then growth is what’s needed to elimiate the defict that created the growth?

  23. DeDude says:


    Good job you are getting there. If you owe $250K on your house the mortgage will be much less of a burden if your salary double. A $16 trillion national debt is much less a burden in a $32 trillion growing economy than in a stagnating $16 trillion economy. It really isn’t that hard to understand. This country needs to get back to work so it can pay its bills.

  24. gman says:

    Governments, consumers and business cannot all retrench at the same time…. just like all nations cannot run trade surpluses at the same time.

  25. MayorQuimby says:


    Here are the multipliers you mention being so ‘powerful’:

    Trying to maintain perpetual inflation in wages and liquidity is literally impossible. You must step outside the past 100 or so years. There are many reasons why but a great analogy would be this – try chaining 100 people to the back of a car and driving it a 5mph….100 percent will be able to keep up. Now accelerate to 8mph…10% suddenly fall. Then accelerate to 12 mph etc etc etc

    If you think of purchasing power instead of money the situation becomes clearer – whenever you increase liquidity, you reduce purchasing power same as stepping on the gas in the aforementioned model.

    So…unless you increase purchasing power in tandem with inflation equally you cannot perpetuate inflation – and THAT increase in purchasing power (artificial) is the very definition of hyperinflation.

    Short version (and I fully expect you to ignore everything I just wrote and shout and insult but hope I am mistaken):

    Gvmt cannot spend itself into prosperity or there would never ever be any problems – we could just ALWAYS spend more, print more etc. How could the world POSSIBLY be so simple?!?!?!

  26. Oral Hazard says:

    I just verified that this word has not appeared in Barry’s post or in any of the comments:


    There, I said it.

  27. eliz says:

    Economist and economic historian Michael Hudson: “America’s Decpetive 2012 Fiscal Cliff”

    snippet: But history is written by the victors, and the past generation has seen the banks and financial sector emerge victorious. Holding the bottom 99% in debt, the top 1% are now in the process of subsidizing a deceptive economic theory to persuade voters to pursue policies that benefit the financial sector at the expense of labor, industry, and democratic government as we know it.
    This pro-austerity mythology aims to distract the public from asking why peacetime governments can’t simply print the money they need. Given the option of printing money instead of levying taxes, why do politicians only create new spending power for the purpose of waging war and destroying property, not to build or repair bridges, roads and other public infrastructure?
    Today’s economic warfare is not the kind waged a century ago between labor and its industrial employers. Finance has moved to capture the economy at large, industry and mining, public infrastructure (via privatization) and now even the educational system. (At over $1 trillion, U.S. student loan debt came to exceed credit-card debt in 2012.) The weapon in this financial warfare is no larger military force. The tactic is to load economies (governments, companies and families) with debt, siphon off their income as debt service and then foreclose when debtors lack the means to pay. Indebting government gives creditors a lever to pry away land, public infrastructure and other property in the public domain. Indebting companies enables creditors to seize employee pension savings. And Indebting labor means that it no longer is necessary to hire strikebreakers to attack union organizers and strikers.

  28. wally says:

    Want to make your car go faster? What should you do:

    a. Step on the brake.
    b. Step on the gas.

  29. mad97123 says:

    DeDude, I understand the country needs to get back to work. I’m just questioning the logic of taking out a mortage on my home to pay myself to work so I can pay off the mortage I took out to pay myself to work.

    I just don’t buy that we can borrow ourself to sustained growth. The growth we are trying to sustain was artificial, unsustainable.

    The reset will come, and then we can start the cycle over. Or we can now nowhere for 20 years while debt to GDP climbs ala Japan.

  30. RW says:

    Part of the problem obviously is a kind of willful ignorance, a failure to recognize that not all economic models are created equal, some actually do work and work quite well if you understand their limitations. Models don’t just have a set of internal operations, they have a domain where they possess greater verisimilitude.

    As a case in point, Hicks developed a superficially minimal (but actually rather subtle) model based on Keynes that still gives a very useful general overview of the macro economy. Hicks decided it was too minimal later in his career but, as it happens, the basic model works incredibly well when the economy is in a liquidity trap; that is, a zero interest rate environment.

    Everyone from the Supply-siders to the Austrians to Pimco and Paulson to the (lord save us) Deficit Scolds got, and are mostly still getting, virtually all the major variables flat wrong while good old 1930′s Hicksian IS-LM continues to slam-dunk it.

    Those who refuse to learn from history are doomed to repeat it; those who persist in still listening to those who refuse to learn from history doom themselves as well as others.

    NB: A big reason Paul Krugman got so much right was because he neither forgot his economic history nor did he forget his Hicks (reality has a well-known liberal bias too of course): Years ago he explained IS-LM to his MIT students here but gives a more recent and ‘plain language’ account here with expansions here and here.

    A large percentage of my investment success this past decade can be traced to making a serious attempt to understand Hicks; e.g., the model convinced me that bond prices would continue to rise inexorably so I was not only never scared out of my long bond positions but bought more. I have been reducing these positions recently however, not simply because the economy is slowly regaining its feet but in the face of the possibility the Republicans may finally succeed in turning the US of A into a bum and scofflaw that refuses to pay its debts even when it is capable of doing so.

  31. rd says:

    The most interesting graph in the slide deck that BR referenced a couple of days ago was on Slide 37 which showed the M2/Monetary Base Monetary Multiplier which was at 3.9 in December. It cliff-dove from 9 to below 5 in 2008 and is lower today than it was in late 2008 and 2009 when the world was ending.

    I don’t see austerity being successful at reducing geovernment debt and spurring growth until that Money Multiplier rises to something close to pre-crisis levels. Until business, consumer, and local government confidence returns and the Money Multiplier goes up, the central banks and federal governments will have a major role to play. As the Money Multiplier increases, the central banks can reduce their injections and the governments can take their foot off the gas. Unfortunately, the economists have failed miserably at coming up with coherent and executable ideas on how to increase the multiplier. Clearly, the tax cuts beloved by the GOP right haven’t been the answer as the multiplier cratered and stayed down while the Bush tax cuts still had several years to run. Similarly, just extending unemployment benefits etc. hasn’t been the answer either.

  32. DeDude says:


    Your example is talking about something with a multiplier of 1.0. But government spending often have much better multipliers. Remember work on your house, even if conducted by you, will include purchase of materials that then give someone else work to do (producing those materials), and that person is purchasing something from the corner store etc. etc. Furthermore, in a down economy the government actually lose expenses when it hire someone to repair a road, because now it does not have to pay that person unemployment and food stamps etc. It instead gains income as it can tax the person and companies doing the work. Many times when the spending is on education or infrastructure then there are direct effects on improving efficiency and productivity of the economy. When the government can borrow at negative real interest rates the deal becomes even better. Think of your example but now with the ability to take out a $100K loan and just pay back 95K 5 years later – even with a multiplier of 1.0 (pay myself to work so I can pay myself to work…. ) it would be a good deal, right?

    This only works when the economy is in a slump. It is not the best way to increase economic growth when it is operating close to full capacity (when there are few unemployed people).

  33. RightSmart says:

    BR –

    The key here, as I understand it, is that you are trying to make the point that a fiscally contractionary policy (i.e. higher taxes, lower government spending) hurts economic growth more than was previously anticipated, using the study and chart as supporting evidence. However, that evidence is less valid than on first blush if one uses different time periods or a different dataset, as detailed in that Financial Times article. I’m not a statistician so cannot validate the FT’s analysis and/or rationale, but if the data isn’t as robust as the common media interpretation implies I think that’s a valid thing to point out.

    By the way, I meant to type Germany and Greece above, rather than Greece and Greece, but I’m sure you figured that out.

  34. NoKidding says:

    The argument seems to have taken a US turn.

    So what happens when interest rates go up?

    1) Current debt is greater than GDP and increasing proportionally.
    2) Average maturity of debt is less than ten years.
    3) At no point during the last 40 years has the US gov run a surplus large enough to pay down 10 percent of current debt.

    1+2+3 = On net nearly all of the current debt will be rolled over as new borrowing replaces old. Not a fact but true under any reasonable scenario.

    4) Before a recovery can grow strong enough to approach 10 percent of current debt, the risk free return (treasury’s cost of new borrowing) will increase.
    5) Every dollar of economic growth generates much less than one dollar of tax revenue – by definition. Otherwise it would be impossible to sustain a government debt.Keynesianism says the economy grows, not the gov’s take.
    6) Every increase in borrowing cost forces either an increase in government revenue, or a decrease in the average maturity.

    4+5+6 = The ease of paying back accumulated gov debt does not necessarily get easier as the economy improves. Right now it seemingly would, but the limit is set by your assumptions of the upper limits of certain numbers.

    Total debt now = 16 trillion
    Reasonable deficit expectation in the near term = 1 trillion/year
    Reasonable guess at total debt when we reach a healthy economy (e.g. UE rate around 6.0) = 20 trillion

    10 year rate now = 2 percent
    Range of rates from 1950 to present = 2 to 14 percent
    Reasonable guess at 10 year rate in the healthy economy scenario = 6 percent

    Soooo… If the economy really got rolling by 2016 in a perfectly reasonable scenario, then interest on deby would be in the 1 trillion a year ballpark. Which is coincidentally around the net borrowing in todays unfortunate economy.

    Leading one to the conclusion that once the debt reaches a certain size relative to the economy, it becomes permanent. Unless “something else” is tried. Shinzo Abe has recently been discussing “something else” for Japan’s debt problem.

  35. AtlasRocked says:

    BR wrote: “Namely, the math of choking off government spending and raise taxes, crimps the economy, reduces job creation and hurt tax revenues — thus creating an even bigger deficit.”

    Show us the money borrow/invest/tax/payback cycle you believe works- with math – that will make it clear, BR. Use all best case numbers, and show us how borrowing money creates payback wealth. Don’t use “world war happens” in the end of your analysis. Don’t use “magic growth”, tell us how much growth and how much CURRENT spending cuts are required for payback of 16 trillion in, say, 20 years.

    In other words, show us you are treating US borrowing just like you and I understand our house or car loans – we know the numbers, we know we can pay it off.

    we are all intelligent here and you can tell us your assumptions and justify them.

    Or – use best practices examples, show us in a report like I posted recently, from Harvard, that showed all recovering countries require around 5:1 spending cuts to tax increases.

    Show us the money: show us either math or history that there are a series of countries that have used stimulus and recovered – without a war. We DONT want a war to fix our economy.

  36. DeDude says:

    Imagine a society with 3 people. Each person is specialized in each of the following trades; one can only make food, one can only make shelter and the last can only make clothes and shoes. Their only way of exchanging products and services is by purchasing from each other (no bartering allowed). Each of them are full time employed by producing enough for 3 people of the thing they are able to produce; and money goes back and forth between their hands as each purchase what he cannot make and sells to the others what they cannot make. Now a guy called Bubble Bank comes and takes away all their money. Each of them can no longer purchase from the other and each will become 2/3 unemployed, because the two others no longer can afford to purchase his services. This little 3-person society is thrown into a huge depression with the economy and output reduced to 1/3, and the 3 people each suffering from serious unfulfilled needs.

    I know you are thinking about them just bartering with each other, but I banned bartering because we know that it just doesn’t work that well in the larger complicated society (that I am modeling). We all know that the solution is for at least one of these 3 people to somehow get some money so he can purchase something from the two others, who can then purchase something from the first guy and each other, etc. So some other guy called Big G knows how to print brand spanking new money and he also has no problem borrowing money from Bubble Bank (who would never lend anything directly to the 3 people because they are unemployed). So Big G borrow (or print) some money and ask the guy who can make shelter to build a specialized form of shelter called school. He does that, get some money for his work, and goes back to the little 3 person society and purchase some food and clothes from the 2 other people who now have money and can purchase, etc., etc.…… And they all lived happily ever after because of the wonderful multiplier action of what Big G did – and despite the despicable behavior of Bubble Bank.

  37. carleric says:

    I suspect the real solution is a bit too simple for the Keynesians or those who see government spending as a net positive. Government spending for the most part is just money down a rat hole…perhaps we should simply reduce our tax burden, s**tcan a million unnecessary programs, federal bureauracies and federal parasites, let consumers put their money to work in the economy and get the genius bureaucrats in the uemployment line. We can use that type of austerity. Folks government is evil, the bigger it is the more evil it is.

  38. mad97123 says:

    DeDude, why would Bubble Bank loan any money to Big G when Big G is really just the same three unemployeed people?

    It sounds like before Bubble Bank and Big G entered the picture the island could grow at a natural growth rate associated with each person productivty. No debt or money printing was needed, nor was inflation of the original money base. You would only need to expand the money supply with additional population growth. Creating more paper money does nothing to increase the islands productivity.

  39. DeDude says:


    Yes there is a problem if interest rates for government debt is allowed to exceed the sum of inflation and real GDP growth (or just call it nominal GDP growth), then it actually begins to cost real money to have debt. But the only thing that can drive up interest rates is a red hot economy and the more the economy grow the higher the rates would have to be to exceed nominal GDP growth. Furthermore, the higher the nominal GDP the less the burden of all previously accumulated debt (16 trillion of debt is a lot less burdensome in a 32 trillion economy than in a 16 trillion economy). The only reason that real interest rates for government would be allowed to go positive would be if the Fed decides that it should. My guess is that they would not make such a decision until or unless the economy and government finances could handle it. What kind of drugs would they be on to allow the 10-year rate to go to 6% if that would destroy the economy?

  40. DeDude says:


    What else could Bubble Bank do with its money? Anyway we can just let Big G print the money if we assume that Bubble Bank does not want to lend its money out. The story about how injection of liquidity is needed to overcome a depression and get people back to being employed and productive again, is just the same.

    Well certainly the island would have been so much better off without Bubble Bank, but when I told Bubble Bank I was going to throw him out, he said: “you and what army”? I am not sure what you have against Big G – who else would have been able to save those people when their economy was fried – and if you claim that Big G was really just the same three unemployed people, would they be better of without themselves? The point is that without a bartering system they do need money and they do need debt and they need to be able to respond to externalities with contraction and expansion of both debt and money supply. The 3 people stuck with no ability to purchase each others products and a productivity that is just 1/3 of their actual capacity cannot get out of that hole without.

  41. NoKidding says:

    Back @DeDude

    Your thinking did not take into account the size of the debt outstanding. Put some numbers on it.

    10 percent GDP growth would be red hot.
    It would take about seven years of that growth to double the economy.
    Seven straight years of 10 percent growth in a 1st world economy would be outlandish by recent standards.

    I think the number that matches a realistic “good recovery” scenario would be an average of 5 percent for about a decade. But here at the hopeful start we’re borrowing 1trl on a 16 try budget, or over 6 percent of GDP. Projecting the debt total forward and the rosy GDP scenario forward for about a decade you get about 27 trillion GDP and 20 trillion in debt.

    That would be one heck of a recovery, and it would be unlikely to last that long let alone go further. That leaves the US starting the next recession in a worse debt ratio than the last one.

    Keynesianism, if we concede it works for the sake of discussion, requires that the debt ratio hovers around a low ratio, which it has failed to do. When the debt accumulates across cycles, as it has been doing, it does not matter whether Keynes was right. We’re only applying the half of the plan that wins elections.

  42. DeDude says:


    That sounds great. Currently we have 16 trillion debt and 16 trillion GDP for a debt of about 100% GDP. If your projections say we will have 20 trillion debt (with the assumption of 1 trillion in annual deficit in a red hot economy????) and we will have a 27 trillion GDP economy, then we will have reduced the debt from 100% GDP to a mere 74% GDP. Sounds like we are going to have to increase spending drastically to make sure the debt does not dive so low that the dollar rise and kill our growth.

  43. mad97123 says:

    DeDude, I have nothing against Big G, just pointing out that Big G has no money of it’s own.

    Instead of putting some money away for an injection on a rainy day, Big G borrowed even more more money on the sunny days to make those seem even better. We now an injection every day regardless of the weather.

    If Big G did not defend Bubble Bank, then Bubble Bank would have colapsed of it’s own stupidity, leaving the 3 islanders with their original, natural, growth rate.

  44. willid3 says:

    i suspect that some are still applying micro economics to a macro problem.
    currently none of the private sector spenders will spend any thing at all.
    consumer wont because they are scared for their jobs, and their incomes are falling.
    business wont because their sales are falling (which is directly related to falling incomes above even though business has been the main driver of that ). and in spite of some folks claim to be business experts, business doesnt hire until they have to based on demand for they sell. low demand = few jobs and low wages

    so that leaves who to pick up the pieces if the government cuts spending??? since the rest of the world is in the same boat as we are( and most are in much worse shape too), they aren’t going to buy US products to make up for the cuts.

    all that we are trying to get done is to have the government prime the pump so that the economy can be self sustaining. which it can’t be now. when the economy does take off, the government can cut spending (hopefully this time they really will. unlike the last time after a recession when it seemed to ignore that, but then jobs never did take off back then either).
    and so far that grand experiment on the economy to demonstrate that lower taxes increases tax revenue seems to be a bust. also seems to be bust in job creation too.

  45. DeDude says:

    Just to make sure we are looking at the same data here is the Debt to GDP ratio:

    The debt went way over 100% during WWII then responsible government took it down until Reagan arrived. Clinton (with help from tax increases by Bush I) send the ratio back down. Then Bush II with his insane policies and creation of a financial crisis exploded it up again. Obama policies are bending the curve and should begin reducing the debt to GDP ratio in a year or two depending on the spending cuts passed in the next few months.

  46. RW says:

    “I have nothing against Big G, just pointing out that Big G has no money of it’s own.”

    I don’t care who you are that’s funny right there.

  47. Haigh says:

    Lukey’s question merits repeating:

    “I’ll ask again, when you are buying sub 2% GDP growth with 5-7% of GDP deficit spending, how many years does it take to spend your way to prosperity?”


    BR: You seem to believe those numbers are static, that as employment rises, marginal entitlement spending will not fall and tax revenues will not rise. You lack a fundamental understanding of the dynamics of complex systems.

  48. Biffah Bacon says:


    How many wars in how many countries are in your household’s budget? Do you have a room with a printing press? Cuz that’s pretty awesome.

    I would suggest credit is due for solving the sticky wages problem.

  49. Joe Friday says:


    I suspect the real solution is a bit too simple for the Keynesians or those who see government spending as a net positive. Government spending for the most part is just money down a rat hole…perhaps we should simply reduce our tax burden

    You “suspect” wrong. You have it exactly backwards.

    Unincentivized tax cutting is “money down a rat hole“, as it’s the very least stimulative action one can take. The return on every $1.00 spent is only $1.01.

  50. debrabradley says:

    A “depression” is a psychological event manifesting itself into an economic one. Government spending (including Fed increasing money supply) has been useful for one reason: it counter acted the implosion of private money supply. However, its not an economic policy or strategy for growth. No one is “inspired” by government activity. There’s only one way out: grow.

  51. Lukey says:

    So, if there really was a fiscal multiplier greater than one (or even equal to one), why wouldn’t we see a huge GDP growth spurt throughout the Obama Administration, as spending jumped from about $2.8 trillion to the ~$3.5 trillion level that has been the norm since Obama’s first year in office? A sustained rise in spending of that magnitude would have to have a clearly noticeable effect on GDP if the fiscal multiplier greater than one existed.

  52. DeDude says:


    The thing you are missing again and again is context dependent rules and actions. Nobody would continue doing a thing even after it has has done its good and begins having severe side-effects. Because you help your circulatory system with a single glass of red vine does not mean that you will continue drinking until every bottle in your stash is gone and you have died of alcohol poisoning. There is a huge difference in the effect of increasing liquidity when the economy is operating way below capacity compared to when it is at capacity. There are times when increasing liquidity will reduce purchasing power and there are times when it will not. Just like adding another 3 oz of water to a glass will only create a big mess if it is already filled close to capacity. There is a reason that all your fine models of inflation have fallen flat on their face during the largest largest liquidity boast in history. It is not that we have not waited long enough or that Benny need to add another zillion trillions before your stop being wrong – it is because you fail to understand that in a liquidity trap all those nice little rules for normal times go out the window.

  53. DeDude says:


    If private demand drops 2 trillion and Obama increase spending with 0.8 trillion GDP will go down. Not because there was no multiplier in the increased spending, but because its effect on growth was neutralized by the even bigger cuts in the private sector. Those $350 unemployment checks may keep people from starving, but they will not allow them to keep up the same level of spending they had when they got $1000 paychecks. By the way if there were not such thing as a multiplier greater than 1 then there would be no way for economies to grow.

  54. Joe Friday says:


    So, if there really was a fiscal multiplier greater than one (or even equal to one)


    There are more encompassing examples, but let’s go with the one from Mark Zandi, a REPUBLICAN economist, who was the economic advisor to the John McCain presidential campaign and is now with Moody’s Analytics:


    As you can see from his chart, tax rate cuts, as well as other tax cuts, BLOW CHUNKS, whereas government spending directly into the economy has significantly more impact.

    * Cutting taxes is regressive, or anti-progressive taxation, and produces unsurprisingly horrendous results because the Rich & Corporate save rather than spend and already have so much excess discretionary income.

    * Government spending produces spectacular results because the people at those income levels have little or no discretionary income and spend 99%+ of any additional income right back into the national economy.

    why wouldn’t we see a huge GDP growth spurt throughout the Obama Administration

    As Tweety Bird would say, We DID ! We DID ! We DID see “a huge GDP growth spurt”.

    In the last QTR of Chimpy Bush’s term, the GDP was a NEGATIVE 8.9% and accelerating downward. As a result of the stimulus enacted, a year later the GDP was +3.8%. That’s a swing of more than 12% GDP from negative to positive. The problem was the vast size of the economic hole, not the stimulus.

    Oh, and your cited graph of “federal outlays & receipts” is ridiculously misleading, as it includes numerous “outlays & receipts” that are self-financed and either not part of the federal budget and/or are not part of general federal revenues. A terrible metric.

  55. Lukey says:

    Still, you have annual “stimulus” of ~ $800 billion since 2009. If there was (always) a fiscal multiplier in effect on government spending, you would expect to see the GDP growth rate increase steadily year over year throughout the Obama Administration, due to compounding effects of the multiplier coupled with additional stimulus spending each year. We did not see that. In fact, growth, while still negative, was recovering before Obama added his “American Recovery Act” spending in the latter half of 2009 and then the growth rate improvement plateaued. Since then it has bounced around almost randomly. That is the exact opposite of what one would expect if a government spending multiplier effect currently existed (which is what we are talking about here – as opposed to a multiplier associated with organic private sector growth). And I never said there is no such thing as a multiplier greater than one. I’m just suggesting that there doesn’t seem to be one in effect right now with respect to the Bush/Obama spending spree.


    BR: You have annual stimulus since 2003 of $3-400B a year in overall tax cuts, plus another $4-500B in non-defensive war spending.

    The deficit did not start Jan 20, 2009 you know . . .

  56. Lukey says:

    I understand the dynamic effects of growth on revenues and spending. I’m merely pointing out that the economy doesn’t seem to really be all that dynamic right now. And I’m asking how long we should keep expecting that to change when we keep doing the same policies to address it year after year?

  57. markbc says:

    Austerity won’t work, and neither will stimulus. This is because all of the economic models (from Keynesian all the way to Austrian) implicitly imply economic growth. Without growth, the models fall apart. Unfortunately, the economy has actually been contracting since 1999 because of resource scarcity. Contraction will continue to intensify as Peak Oil really gets into full swing. We will see hyperinflation or something similar in the near future, after which the US oil trade deficit will not be able to be maintained, and then GDP will drop even further. This will likely end with either a global nuclear war or Malthusian Collapse where the population is reduced about 5 fold globally, but possibly North America may be able to avoid the worst of this because we still have lots of productive farmland, and apparently lots of coal.

    It’s pretty sad and depressing, but that is unfortunately the outcome we seem intent on ensuring because as a continent, North America seems uninterested in seriously adopting renewable energy. As revealed in another post today on TBP just up from this one, the 6th richest men in the world are the Koch brothers, they are oil men, and unfortunately they are in charge. They will be leading us into death.

  58. Joe Friday says:


    Still, you have annual ‘stimulus’ of ~ $800 billion since 2009.

    I WISH.

    The original one-time stimulus either expired or slowly phased-out, and GDP then slowed. It worked spectacularly given what it was, but was much too small considering the vast size of the economic hole.

    …Obama spending spree

    Non-defense discretionary spending hasn’t been this low since Eisenhower was in office in the 1950s.

    Some “spree”.



    Austerity won’t work, and neither will stimulus.

    Well, you’re half right.

    Austerity won’t work as it’s never worked.

    Non-tax-cut stimulus works and has always worked like a charm.

  59. DeDude says:

    Sorry Lukey but the real stimulus package was passed in March 2009 and ran for about 2 years. When you look at the unemployment and GDP in 2009-2010 the effects of stimulus it is clear. The fact that certain types of government spending goes up in response to a severe downturn in the economy has nothing to do with “stimulus”. That spending is simply an automatic brake on the worst social consequences and it is not expected to have a stimulatory effect (as in increasing growth). When a person exchange their $1000 paycheck with a $350 unemployment check that government spending is obviously not going to be increase growth, it simply brake some of the fall. If you want a “stimulus” that you “expect to see the GDP growth rate increase” you have to add additional new money, not just partially compensate for the economic contraction. You don’t build a tower by digging a hole and then throw a little bit of the dirt back in that hole, nor do you get “GDP growth rate increase” by compensating a little for some of the worst economic contractions. No matter how much you redefine the word “stimulus” the facts are clear and the stimulus in US and China compared to the austerity in most of Europe has finished the debate about Keynesian policies – unless you are a moron or design your reality around a political view rather than facts (I guess I repeated myself).

  60. markbc says:

    Joe Friday,

    “Non-tax-cut stimulus works and has always worked like a charm.”

    It has always “worked” because historically there were always enough resources available to power subsequent growth. Now there aren’t. In fact, they are now beyond plateauing; they are dropping in the US. That’s why non-tax-cut stimulus isn’t working, and won’t work. There is a direct relationship between economic growth and resource consumption (most notably, consumption of fossil fuels). I am continually amazed at how economists can throw around all their terms and analysis in such great detail, without any consideration of the real-world consequences that those policies entail and the support structures they require. They discuss at great lengths the problems with the economy, yet never make the obvious link to the fact that per-capita oil production in the US today is half what it was 40 years ago.

    Energy-wise, our economies are no different than a culture of yeast in a petri dish. We must grow at an exponential rate, and we do that by burning complex carbon molecules; when the source of carbon is used up then growth stops and reverses. Whether you like being compared to a culture of yeast or not, that is unfortunately the fact, because in terms of energy, that is exactly how our economies operate. The way we could have achieved a collective intelligence greater than that of yeast would have been to transition our energy systems away from burning complex carbon sources. Unfortunately we chose to abandon renewable energy, and therefore we will follow the fate of yeast in a petri dish. And I am predicting that all the while, as our societies crash, we can expect economists to continue debating about how stimulus or austerity will do this or won’t do that…

  61. Joe Friday says:


    It has always ‘worked’ because historically there were always enough resources available to power subsequent growth.

    No, it worked simply because it actually works.

    Now there aren’t.

    Of course there are. We have a $16 trillion national economy and nominal GDP over the next decade should be about $200 trillion.

    You likely meant such resources are misappropriated.

    That’s why non-tax-cut stimulus isn’t working, and won’t work.

    Except we all just watched it work rather spectacularly.

    Unfortunately we chose to abandon renewable energy

    That would be news to Iowa, where more than 20% of the electricity demand for the entire state is being derived from wind. Solar utilization is exploding in this country, as the efficiency is growing exponentially (doubling every two years), while the cost plummets.