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IMF admits that austerity was a miscalculation

Translated Friday 11 January 2013, by Kristina Wischenkamper and reviewed by Bill Scoble

It is a quite startling report: a well-analysed and quantified mea culpa signed by two eminent IMF economists, explaining quite clearly that austerity is a mistake, the result of a poorly designed computer model of economic prediction.

In effect, IMF economists excuse the fact of having plunged 26 countries into a deadly spiral of austerity by pointing to an error in their mathematical model. These economists, however, remain convinced that their domain is one of hard science, one that can predict outcomes, and whose outcomes can be demonstrated by equations. But they could not have been more mistaken. They thus admit in their introduction that their model failed to predict either the high level of interest rates or the deleterious effect that austerity would have on household spending. Confronted with reality, they must now also admit that their model greatly underestimated the consequent rise in unemployment. And thus any predicted outcome is fallacious, be it the level of private investment or expected tax revenue of States.

Sorry about the dead, it was a miscalculation

«Forecast Error of ΔYi, t: t +1 = α + β Forecast of ΔFi, t: t +1 | t + ε i, t: t +1»

That’s what the equation looks like, the one that was incapable of making a correlation between State spending cuts — those famous "savings" required by the imminent danger — and lower tax returns. This is the "fiscal multiplier", the economic tool that worked — more or less — between the Second World War and 2008, but which is incapable of calculating the enormity of the effects of widespread panic or the complete psychological depression of the global population.

The IMF already suspected a miscalculation in the economic models it applied to Greece. Hence it must now also call into doubt all those models it has applied to the 26 other European countries.

The error that does not serve as a lesson

Although acknowledging the error, or rather simply opening its eyes to reality, is a step in the right direction for the IMF, the institution can’t yet quite learn from its mistakes. These economists do not fundamentally challenge the basis of austerity, just its level of intensity. They are convinced that all that is needed is to tweak their computing model by increasing the variable "human factor". They see no problem in imposing global policies based on a threat that is nothing more than the result of an algorithm.

Let us just remind you that “human decisions affecting the future, whether personal or political or economic, cannot depend on a strict mathematical expectation, since the basis for making such calculations does not exist," as some chap called Keynes once said in 1936.

The IMF Working Paper is attached.

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