IMF Admits More Mistakes

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

I’ve commented numerous times over the the last 3 years that I considered the IMF’s position on Europe dangerously misguided as I felt it was based more on ideology than evidential analysis (see more here). I have posted on a near-daily basis over the last 2 years on the slow downfall of the euro-zone under what I considered to be a policy framework that was doing more harm than good due, in part, to the fact that it underestimated the feedback from on-going government sector austerity in an environment of private sector balance-sheet retrenchment. (See more here)

Back in December 2011 I made the prediction that:

.. while there is no credible counter-balance for the effects of supra-European austerity any attempt to implement the new “fiscal compact” will make Europe’s economic issues worse. The continent is already on the way to recession and unless we see some additional action from the ECB, or a huge swing against this new framework, the push to implement the outcomes of the summit will simply accelerate that outcome. My assumption is that, if Europe does ratify this framework (there are a few stragglers), after 12-24 months of trying the effect will be so disastrous that they will eventually give up. But until then my base case for Europe is a significantly worse economic outcome.

Since Christine Lagarde took over as the head of the IMF I have noted a quite a few times that the organisation was slowly steering itself away from it’s previous position of “expansionary fiscal consolidation” and appeared to be finally taking notice of its own research that demonstrated its errors. Of note in recent weeks is that the IMF has been offering new guidance to the Eurozone which is in-line with my previous prediction.

The International Monetary Fund and European Commission officials have encouraged France and its eurozone partners not to fixate on deficit reduction targets if it would exacerbate the bloc’s debt crisis. The head of an IMF mission in France, Edward Gardner, urged officials in Paris last week to consider their 2013 budget targets “in a broader European context.”

The IMF and the EU Commission expect the French public deficit to amount to 3.5 percent of gross domestic product (GDP) next year. They do not believe France can reach its 3.0 percent goal, the eurozone limit, without additional measures that could aggravate an already tenuous economic situation.

“The credibility of the medium term orientation policy” was more important than a specific deficit target, Gardner told reporters.

Loosening the criteria would “be more effective, more credible in a coordinated fashion” across the 17-nation eurozone, he suggested.

Of greater note, however, is the latest research from the IMF and statements from their chief economist that appears to suggest that they simply didn’t know what they were doing.

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.


“Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation,” Blanchard and co-author Daniel Leigh, a fund economist, wrote in the paper.

That somewhat dry conclusion sums up what amounts to a tempest in econometric circles. The fund has been accused of intentionally underestimating the effects of austerity in Greece to make its programs palatable, at least on paper; fund officials have argued that it was its European partners, particularly Germany, who insisted on deeper, faster cuts. The evolving research on multipliers may have helped shift the tone of the debate in countries like Spain and Portugal, where a slower pace of deficit control has been advocated.

A reading of the conclusion of the actual report (available below) is quite revealing as it shows that the IMF teams appear to have taken non-dynamic estimates of the outcomes of their programs under the assumption that even the most radical cuts to the government sector would always deliver a net economic positive.

What do our results imply about actual multipliers? Our results suggest that actual fiscal multipliers have been larger than forecasters assumed. But what did forecasters assume? Answering this question is not easy, since forecasters use models in which fiscal multipliers are implicit and depend on the composition of the fiscal adjustment and other economic conditions.

We believe, however, that a reasonable case can be made that the multipliers used at the start of the crisis averaged about 0.5. A number of studies based on precrisis data for advanced economies indicate actual multipliers of roughly 0.5, and it is plausible that forecasters, on average, made assumptions consistent with this evidence. The October 2008 WEO chapter on fiscal policy presents multiplier estimates for 21 advanced economies during 1970–2007 averaging 0.5 within three years (IMF, 2008, p. 177). Similarly, the October 2010 WEO (IMF, 2010d) chapter on fiscal consolidation presents multiplier estimates for 15 advanced economies during 1979–2009 averaging 0.5 percent within two years. This evidence, and our finding of no gap, on average, between assumed and actual fiscal multipliers before the crisis, would imply that multipliers assumed prior to the crisis were around 0.5. Relatedly, the March 2009 IMF staff note prepared for the G-20 Ministerial Meeting reports IMF staff assumptions regarding fiscal multipliers based on estimates from various studies. In particular, it contains an assessment of the impact of the 2008–10 fiscal expansion on growth based on assumed multipliers of 0.3–0.5 for revenue and 0.3–1.8 for government spending (IMF, 2009b, p. 32)

If we put this together, and use the range of coefficients reported in our tables, this suggests that actual multipliers were substantially above 1 early in the crisis. The smaller coefficient we find for forecasts made in 2011 and 2012 could reflect smaller actual multipliers or partial learning by forecasters regarding the effects of fiscal policy. A decline in actual multipliers, despite the still-constraining zero lower bound, could reflect an easing of credit constraints faced by firms and households, and less economic slack in a number of economies relative to 2009–10.

So they got it wrong and have now, in part, acknowledge that fact so we should see adjustments to their existing programs to take into account this new information and the fact that fiscal multipliers are 1 ) dynamic; and 2 ) capable of producing self-defeating economic outcomes. Let’s hope that is the case, and recent advice to the EU suggest that may be, but the outstanding question for me it whether the other members of Europe’s troika are willing to listen to them if they do.

Full report below.


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  1. from Mexico

    I think the IMF’s epiphany is a perfect example of where science follows politics.

    As long as the IMF was murdering the economies of countries outside the Continental-AngloAmerican core, nobody really cared about the deliterious effects of its pseudoscience. The IMF’s debauchery of science existed because it served the interests of transnational corporations, and because those who had to suffer its consequences were far away and easy to ignore. In its track the IMF has left forty years of economic devastation and mayhem, all wrought by the IMF’s pseudoscience and failed policies, which the IMF religously blamed on its victims.

      1. rotter

        Institutions like the IMF have no place in the world today. They are as you point out a purely idelogical entity, created during the cold war as yet another weapon against Socialism. All of these hyper-idealogical cold war institutions should be abolished

    1. Mick

      Staggering. All those African, Caribbean and Latin American nations hobbled by debts that were deliberately unpayable. Two generations of structural adjustment to gut infrastructure…Ooops sorry Greece. How were we supposed to know? Would it help if we sent some of our subsidised milk powder and rice? We could arrange a loan if you can’t afford it just now.

      1. rotter

        Right, and why is this still going on over 20 years after the fall of Soviet Communism? The weaponised financial institutions of the cold war era are turning on thier creators as they need to justify thier ongoing exsitence.Their only ideology is plunder, but hey that is the ideology of freemaketcapitalism

  2. Dimitrios Gazis

    Lagarde is a manish intellectual cripple and a crony hypocrite, touting austerity while earning a Queen’s ransom, paid for with the corpses of Greek children. I guess the thought of suffering French children was not as palatable.

    Hypocrite. Clown. Golem.

    1. different clue

      “Manish”? What does “manish” have to do with anything?
      Or is this a Machismopoid Mediterranean-style culture insult?

    2. Yves Smith Post author

      She looks pretty foxy for a woman her age. The only thing mannish about her is her perma tan, which makes her skin look leathery. You see tans like that most often on middle aged men in Monaco.

  3. craazyman

    Institute for Mathematical Fracking

    Working Paper 838373e

    The Calculus of Compound Delusion: Toward a Methodology for Integrating Self-Deception and Obfuscation into a Stochastically Indeterminant Wealth Extraction Model That Even Confuses Us

    Lute M. Barre, PhD
    Wei Flung Du, PhD

  4. Yonatan

    IMF ideological – no! Tell me it ain’t so!

    IMF Modus Operandi
    When all you have is a hammer, everything is a nail.

  5. Yonatan

    Even better,I have just had a look at the linked paper and it list loads of R squared values. They are typically about 0.5 which is equivalent to random variation. Jeez, how much are we paying these peopleforthisBS?

    1. prostratedragon

      “which is equivalent to random variation”

      No. Check definition here, for instance, where shortcomings of the measure also are discussed.

      Also, did the researchers really use R^2 as the main evaluative measure for their regressions? (Haven’t read the paper yet.) That would be a bit surprising. But in any case, the point of the in-house criticism seems to be more that the evolving problem was not well enough understood and modelled.

  6. The Dork of Cork.

    Pushed out of the Irish economy site for the second time.

    I am quite proud of myself really.

    I can be a bit trollish at times but my last comment was something on the lines of
    (taking issue with the language of a IMF paper)

    “With many economies in fiscal consolidation mode”

    Can we please use more honest language.
    Its been 5 years of this already

    “with many economies repairing the balance sheets of private banks at the expense of physical life support systems”

    I then gave a quote from the Frances Coppola blog

    “Or perhaps, more accurately, welcome to the World Central Government. For if governments are banks, and are backstopped by banks, and exist primarily to serve banks and investors, then who is it who really runs this show?”

    Asking when & how Treasuries were taken over by banking interests.

    Stating that while bankers lust for the power of the state.
    Since they can never have it.
    They must destroy it.

    Look these are merely bank lobbyists debating over the sustainable rate of extraction.
    The IMF is really bankers in full control of treasuries.

    Each individual country should just produce taxable Notes without the bond and we can rip the ground from under these bastards.

  7. Systemic Disorder

    I suppose we shouldn’t wait for the IMF to make a formal apology, but it is interesting that it has issued a “correction” twice in the past few months. It is true that austerity is a matter of ideology as opposed to messy reality, but it is also the logical method for capitalists to maintain their profits, in the short term.

    As the maintenance of profits and the system that extracts those profits is the sole concern of the IMF and its sibling institutions, we perhaps should not hold our breath for anything other than meaningless minor tweaks to policy. Ideologies exist for a reason, not as abstract theories for their own sake. The ideology of austerity has not lost its raison d’etre for those who impose it.

  8. diptherio

    Two bulls are standing on a hill, looking down on a pasture full of cows.

    “Hey,” one bull says to the other, “let’s run down the hill and f*#k a heifer!”

    “No,” replies the other bull, “let’s walk down the hill and f*#k all the heifers.”

    IMF=bull number two.

  9. diptherio

    Everytime I read about how actual economists actually practice their craft, my jaw drops open a little. I mean, you have to be willfully ignorant or just plain stupid to think that you can apply a static model to a situation like Greece at present. WTF?

    Assuming everything else stays the same and we just reduce gov’t spending…

    Willfully ignorant or just plain stupid, I can’t decide.

    Reminds me of the Dilbert comic my Econ advisor had hanging on his door:

    “I did the analysis using your bad assumptions. Then I applied your flawed logic and arrived at your predetermined answer. Shall I begin disillusioning the team?”~Dilbert

  10. Glen

    I wouldn’t expect that any errors requiring “correction” would be used other than a more efficent means of bleeding wealth from the bottom to the top.

    Discovering erors in methods or more efficent policies does not change intent. The intent of the IMF is to force whole countries into debt bondage.

Comments are closed.