The headline news from the latest IMF World Economic Outlook is the downward revision of 2013 growth forecasts—from 1.8 percent to 1.5 percent for advanced countries, and from 5.8 percent down to 5.6 percent for emerging and developing countries.
But the report contains an even more extraordinary admission (highlighted in Box 1.1, written by Olivier Blanchard and Daniel Leigh): the IMF were wrong about the fiscal multipliers it has been using in its forecasts and policy recommendations by a factor of 3! Yes, instead of .5, which they had been using, Blanchard and Leigh estimate the fiscal multiplier to be closer to 1.5.
What this means concretely is that the IMF and all the other mainstream economists who were using the lower multiplier severely underestimated the negative effects—on investment, consumption, and unemployment—of the austerity measures that have been imposed in the wake of the economic crisis of 2007-08.
Paul Krugman feels vindicated. Jonathan Portes is willing to give the IMF credit for “going back, looking at their forecasts, analysing what went wrong, and saying very clearly ‘We thought the impact of fiscal consolidation on growth would be relatively small. We got it wrong.’”
For me, there can’t be any forgive and forget. The one thing mainstream economists are supposed to get right is the calculation of multipliers. And they didn’t. And the lives of millions of people have been ruined as a result.