IMF changes its tune on austerity

For many, the word austerity is inextricably linked to the international development community: IMF and World Bank policies that required austerity policies – often draconian in their social impacts – in exchange for development financing and other aid. The IMF is now grappling with a different part of the globe: the withering crises of the European Community. Plumer writes on Wonkblog that the IMF’s chief economist has been studying the relationship between “fiscal consolidation” (aka austerity) and economic growth. And he has released findings that suggest the link may be reverse: pursuing austerity policies may reduce economic growth. Woops! There will no doubt be much ballyhooing (and much cheering) while the economists hash out what the numbers really mean.

For now, though, as both Kate McKenzie and Matt Yglesias point out, it’s quite significant that the IMF has shifted its stance on austerity so dramatically. In the 1990s, the fund was famous or infamous, if you prefer for ordering countries with debt troubles to tighten their belts. But now the IMF is urging countries in the euro zone, such as Netherlands and France, to loosen up a bit.

Matt Yglesias suggests a couple of corresponding responses:

In the US we should be avoiding a disastrous payroll tax hike and probably creating slush funds for our budget-strapped state and local governments.

This may all same (and actually is) quite wonky and theoretical. But the wonky stuff of economics feeds directly into government policy, so even an acknowledgement that the IMF is questioning the presumption that austerity promotes economic growth is, Plumer suggests, “a big change in attitude.”

 

Read: IMF: Austerity is much worse for the economy than we thought.