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The Scandal that's Discrediting All Conservative Economists

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Headlined to H2 4/19/13

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Leading Conservative Economists Exposed as Frauds; Conservatives Defend Them.

Can Conservative Economics Even Survive?

The fracas that the  fraudulent "research" paper  by leading Harvard conservative economists Kenneth Rogoff and Carmen Reinhart has generated, is going straight to the heart of the economics profession, and also to the heart of public policy for dealing with the economies in the U.S. and many other countries. Here is the fundamental issue that's involved in this important history-shaping matter:

The basic war among professional economists has been between the "austerity" camp (of which this paper was the biggest gun), and the "growth" camp.

Austerians say that the way for the world to address the slowdown in the developed economies is for governments to cut government spending. (The fraudulent "research" paper provided selective, jiggered, and even bogus, data supporting this view.)

Growthers say that the way to address it is instead for those governments to increase government spending.

Austerians say that government spending is waste, which drains productive spending by corporations. Austerians say that government spending just increases the national debt.

Growthers say that government spending is sometimes productive, and that corporate spending is itself sometimes wasteful. Growthers say that even sometimes when government spending turns out to be wasteful, and always at times when it turns out to be productive, government spending puts money into the hands of workers and consumers, so as to increase their ability to make purchases, which gets factories and businesses humming again, which increases the nation's economic output and restores the taxes flowing into the government's coffers, so that even the government's debt will decline, over the long term. It's a win-win situation, growthers say: the public benefits, the government benefits, and even corporations benefit over the long term, because their sales-volumes become restored.

The Rinehart and Rogoff "research" was prominently cited by Republicans when preaching conservative economic mythology around the world. One Chairman of George W. Bush's Council of Economic Advisers, Douglas Holtz-Eakin, praised recently  in Britain's Guardian,  "The canonical work of Carmen Reinhart and Kenneth Rogoff," referring there to that fraudulent "research" paper. Another former Chairman of GWB's CEA, Glenn Hubbard, wrote recently  in Germany's Handelsblatt,  citing "the investigations of the two U.S. economists," R&R, as proving that (as his essay was titled), "Nicht von Amerika Lernen," or "You Shouldn't Copy America" in (the Democrats') supposedly too-growth-oriented policy. Conservative preaching is based upon such hoaxes and errors, because that's all they've got. (It's like George W. Bush's proclamations about the fictitiousness of global warming, and about the reality of Saddam Hussein's WMD and other Iraqi dangers to America.)

Even before the exposure of that fraudulent paper, the austerians' case had already been definitively destroyed by numerous research papers, which were authentic.

Here's the book on that: The International Monetary Fund (IMF) issued in October 2010, a "World Economic Outlook," whose entire third chapter was devoted to "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" (otherwise called "austerity,' or the Republican approach in the U.S.). This summary of the research answered its title question with a decided yes, and said: "Based on a historical analysis of fiscal consolidation in advanced economies, ... it finds that fiscal consolidation typically reduces output and raises unemployment in the short term," which causes the taxes that are coming into the government to go down, which causes the government's deficits and debt to rise (thus failing at everything). "Fiscal consolidation typically has a contractionary effect on output. ... When interest rates are stuck at zero [as they currently are], the output cost of fiscal consolidation doubles. ... During this time, the central bank is powerless to offset the slump in aggregate demand and inflation induced by the cut in government spending. The resulting fall in inflation raises the real interest rate, which in turn exacerbates the decline in aggregate demand, amplifying the short-term contractionary effect." In July 2011, an "IMF Working Paper" by Guajardo, Leigh and Pescatori, was titled "Expansionary Austerity: New International Evidence," and it concluded: "Our main finding that fiscal consolidation is contractionary holds up [even] in cases where one would most expect fiscal consolidation to raise private domestic demand," so that "Expansionary Austerity" was basically just a right-wing myth. At around the same time, Roberto Perotti's "The "Austerity Myth': Gain Without Pain?" at the Bank for International Settlements, reported that, "These results cast doubt on at least some versions of the "expansionary fiscal consolidation' hypothesis, and on its applicability in the present circumstances." In September 2011, the IMF issued yet another study, "Painful Medicine: ... Slamming on the brakes too quickly will hurt incomes and job prospects." It found: "The pain is not borne equally. Fiscal consolidation reduces the slice of the pie going to wage earners." On 18 July 2011, economist Mark Thoma headlined to summarize "The Crumbling Case for Austerity," and economist Chad Stone bannered "The Crumbling Case for Cutting Spending to Stimulate the Economy." The matter was essentially closed.

But more studies still poured in, confirming the point. In August 2012, the International Labour Office in Geneva issued "Macroeconomic Policy Advice and the Article IV Consultations: A Development Perspective," and their study showed that: "The "one size fits all' approach" that the IMF had previously been using, which targets low government spending as being a country's way out of debt "has an uneasy existence with the empirical literature," which proves that it doesn't work. Then, in January 2013, the Center for Economic and Policy Research titled a study "Macroeconomic Policy Advice and the Article IV Consultations : A European Union Case Study," and found that austerity ("fiscal consolidation") failed not only with underdeveloped nations, but also with EU nations.

Finally came the coup de grace against the austerians, in an important new study published by the IMF at the start of this year. Olivier Blanchard, the Chief Economist at the IMF, shockingly admitted that their having respected and accepted the advice of conservative economists has turned out to be a blunder, which has cost and is costing the world's advanced economies dearly, and which must therefore be stopped and reversed if the world is to avoid an economic tailspin.

The basic topic of this definitive paper was the core empirical issue that separates the austerians from the growthers: the actual size of the economist John Maynard Keynes's "multiplier" -- the real-world size of the stimulus to the economy that's generated by increasing government spending during flat or declining economic times, such as these.

Keynes had said that in circumstances such as these, 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 simply too small to counteract that negative effect.

This new "IMF Working Paper," issued January 2013 and titled "Growth Forecast Errors and Fiscal Multipliers," was prepared by Blanchard and Daniel Leigh of their Research Department, and it reports that whereas the IMF had been accepting conservative economists' estimates that the multiplier was "about 0.5" percent 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 the economists' jargon, that is called in the United States (and generally among the world's public) "austerity." In other words, the policy that's recommended by the Republican Party's economists, and which has actually been tried especially in Europe, has failed miserably, and this monumental IMF study nailed that, with the empirical data, attacking the IMF's own previous simply false assumptions about the size of the multiplier..

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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 (more...)
 
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... by Eric Zuesse on Friday, Apr 19, 2013 at 4:23:13 PM
of a report by a UMass grad student that recently ... by intotheabyss on Saturday, Apr 20, 2013 at 9:54:42 AM
I didn't link to it, because the article that I di... by Eric Zuesse on Saturday, Apr 20, 2013 at 10:25:27 AM
 Interestingly, IMF should have had empiric e... by BFalcon on Saturday, Apr 20, 2013 at 2:08:26 PM
For example, the " IMF Working Paper," issued Janu... by Eric Zuesse on Saturday, Apr 20, 2013 at 2:41:26 PM
Peter G. Peterson, through the Peter G. Peterson F... by Dennis Kaiser on Saturday, Apr 20, 2013 at 3:11:32 PM
However, he wouldn't have won re-election if he ha... by Eric Zuesse on Saturday, Apr 20, 2013 at 3:28:48 PM