The horizon is not so far as we can see, but as far as we can imagine

Greece and the Emperor’s New Clothes

We are all familiar with the story of the Emperor’s new clothes, yes? The emperor is sold “clothes” which are imaginary, wanders around naked, and everyone pretends he’s clothed until a child points out he’s naked?

Commenter MFI pointed out yesterday that Oliver Blanchard, the chief IMF economist, had made the following assumptions about Greece in July of last year:

1. The Greek economy would grow by three percent both this year and every other year until 2020.
2. Inflation would average between one percent and two percent a year both this year and every other year until 2020.
3. The Greek government would run a primary budget surplus of four percent a year.

As MFI points out, at best, these assumptions are delusional. Greece is in forced austerity; they aren’t going to make these targets.

Edward Harrison has been on the same beat:

…the IMF revised down its estimate for Greece’s 2014 gross domestic product by some 22 percent in the space of 18 months.


Greek GDP forecasts collated by Edward Harrison

Greek GDP forecasts collated by Edward Harrison

As Edward and MFI note, these are damning.

But they are of a piece with estimates of the effects of austerity. Austerity is a reduction in demand. Reduction in demand leads to economic activity being lower than it would be otherwise. Governments who spend less money buy less stuff, this is indisputable. Then, everybody has less money and almost certainly buys less stuff as a result, thus reducing the size of the economy.

Meanwhile, money has been given to rich people and corporations who, mostly, have not spent it and when they have spent it, they’ve spent it on luxury goods.

Austerity cannot help but reduce GDP. This is what it is designed to do.

But it is sold as a way to make economies better. You cannot, as a government or quasi-governmental agency (like a central bank or the IMF), admit that austerity will make the economy worse and many of the people in an economy to which it is applied worse off.

The question, then, is the old one. “Evil, or stupid?” Is Blanchard, for example, such an ideologue that he believes the assumptions which allow him to forecast a better economy under austerity? Are the other economists who have made similar forecasts similarly stupid? I mean, assuming moderate stupidity (normal), they might have believed it in 2008 or even 2010, but we’ve seen the effects of austerity since the financial crisis, and that’s going on seven years.

These people are either very stupid or are doing what they feel they must to keep their jobs and their membership in a very lucrative club. If they were to say, “No, these policies don’t work,” would they keep their jobs?

It’s not that we don’t know austerity doesn’t work, if by “work” you mean “improve the economy more than not being in austerity would,” we do. It’s only ever worked in theory by making very dubious assumptions, and it has never worked in practice.

So, at this point, if you believe austerity works, you’re either an extraordinarily blind ideologue, or you’re crooked, on the payroll, and know what you’re doing.

Austerity is the policy that the IMF, most central authorities, and all neo-liberal parties (which means almost all parties in power in the EU) believe in. It is a policy which works: It puts public assets up for sale which would not be otherwise, so that rich, private investors can buy them up. Combined with “unconventional monetary policy” (the two are Siamese twins), it makes sure that the rich get richer, corporations are flush with cash they do not use to hire workers, and that everyone who isn’t rich, or part of the close retainer class, loses.

You really, really don’t want to fall out of that close retainer class. They are paid very well (Lagarde receives a six hundred thousand per annum salary, entirely tax free), they are treated well, and their future job prospects are secure, as are those of their families.

The Emperor, in other words, is bloody well wearing clothes. If you want to remain the chief economist of the IMF, you had best remember that.

Austerity does what it was meant to do. I predicted its course in 2009, as did many others, and it has performed exactly as expected.

It is working: Its advocates are its beneficiaries. The people who enforce it are benefiting as well and there is a sufficient constituency, both at the elite level and the common level, to keep it going (remember, Cameron was re-elected in the UK, and Labour got many votes when its essential promise was “slightly kinder austerity”). A few countries (Germany, for example) are winning under this policy regime.

So austerity will continue. It is a successful policy which does what it is supposed to do and which has a constituency sufficient for its continuation. It must be sold by lies, to be sure, and many of those who sell those lies probably believe them, because they personally benefit from pushing austerity and people prefer to believe that they are honest and working for good.

Others, I am certain, know it is being sold with lies. Who falls into which camp? Who knows? The end affect is the same.

The Emperor has no clothes and beatings will continue until morale improves.

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  1. Adam Eran

    Worth remembering about the emporer’s new clothes: After the child pointed out he was naked, the emporer didn’t says “Oh! I’d better go get dressed!”… He grimly continued the parade.

  2. Peter

    Excellent observations Ian especially the part about, ‘ beatings will continue until morale improves’.

  3. yellowsnapdragon

    The difficulty finding an agreement between Greece and the creditors is about the Troika’s need to create the false appearance of a necessity to transfer wealth upward. Structural adjustment has never been about strengthening economies. Worldwide debt through IMF, etc. was created to capture nations and force wealth held by citizens and states into the hands of a few banking elites.

  4. Evil or stupid? Why not both? goes the joke.

  5. Pluto

    Very intriguing, Ian. This part begged a question for me:

    Austerity does what it was meant to do. I predicted the course of it in 2009, as did many others, and it has performed exactly as expected.

    It is working: the people who want it done are benefiting from it…. So austerity will continue: it is a successful policy which does what it is supposed to do and which has a sufficient constituency for its continuation.

    Did we drop “quality of life” as a metric for economic policy somewhere along the way? I can’t remember the last time I heard an economic outcome measured by its effects upon the humans exposed to it; their feelings of empowerment, fulfillment, or personal security. Isn’t the purpose of an economic policy — or forming a government in the first place — to benefit society?

    As for Greece, this just in::

    Study: Austerity in Greece led to tragic increase of 35% in suicides in just two years

    Tough financial austerity measures in Greece have led to a 35% jump in suicide rates in a little less than 2 years, new research shows.

    “Our main finding was that after 2010, when harsh austerity measures were implemented in Greece, we noted a significant increase in suicide rates for the years 2011 and 2012 in comparison to the period between 2003 and 2010,” George Rachiotis, MD, PhD, assistant professor of epidemiology and occupational hygiene, University of Thessaly, Larissa, Greece, told Medscape Medical News.

    “In addition, we found that there was a significant correlation between suicide rates with an increase in unemployment in Greece, where unemployment has almost doubled [since 2009] and is now approaching 30%.”

    A wave of human pain carried Syriza into power, and was expressed as such in a dismal Open Letter by Alexis Tsipras, published in Germany just days after his election. Over the course of negotiations, since then, the human imperative has once again left the room.

    Meh. The IMF has always been evil. China will tame them.

  6. CMike

    Based on your comment yesterday [LINK]:

    [QUOTE] So, you MAY not tax rich people, is what that says.

    I may write on this tomorrow. [END QUOTE]

    I thought I’d see a little more about the explicit class solidarity on display in this part of MarkFromIreland’s paste [LINK] in your post today:

    [QUOTE] The creditors also slashed most of Tsipras’ biggest revenue-generating taxes, including a one-off 12 per cent tax on all corporate profits over €500,000 that was to come into effect this year. In their Monday proposal, the government had projected getting €1.3bn from that measure alone, by far the largest revenue generator outside the pension system. A big red line is drawn through that one.

    In addition, instead of the increase in the corporate tax rate from 26 per cent to 29 per cent, as the government suggested, creditors are pushing for a rise to only 28 per cent, a sign of their concern that the raft of new taxes will just make the economy dip back into an even deeper recession. 🙂

    In the place of these new taxes, creditors are seeking new spending cuts, including abolishing subsidies for diesel oil purchased by farmers and doubling cuts to defence spending – from a proposed €200m to €400m – by reducing personnel and weapons procurement. [END QUOTE]

  7. Frank Brats

    What most left-wing people misunderstand is: Austerity is nothing evil – it just means that you cannot spend more than what you take in. I don’t know why this simple concept seems so hard to understand.

  8. Then you will not mind $1 a day – food, shetler etc.

  9. Ghostwheel

    @Frank Brats

    The monetary system is designed to produce unpayable debt in order to funnel real assets back to banks. Banks as private institutions create money out of nothing and lend it out at interest. This means the total amount of principal plus interest in is greater than the total amount of money in circulation.

    Someone has to lose. Poverty, bankruptcy, foreclosure and austerity are built in aspects of the system.

    This fact is not only perceived by those on the dissident left, but by those on the dissident right as well.

  10. Erin Harris

    Hi, I love your work and assume you don’t know the “beatings” reference and Blanchard quotes came from David McWilliams first thing this morning, or you’d have credited him rather than “Commenter MFI,” whoever that is when he’s at home. Cheers, Erin

  11. Iii

    They’re hoarding assets ’cause China would be a mighty big pig for even the American python to swallow.

    They’re getting their torches ready for the mother of all Rosewoods…

  12. CMike

    Frank Brats,

    Actually, austerity Brussels/Frankfurt style -i. e. the retiring of debt by a high unemployment economy rather than taking steps for growing a national economy faster than the ongoing increase of its national debt- means a state is to spend less on its public than what the state is taking in. What right-wing people act as if they don’t understand is that in the matter of actual wealth no market goods and non-financial sector services are ever consumed before they have been produced by the public and private sectors, including the private sector’s for-profit component, so the real question in the present crisis is who should suffer the burden going forward for a pile of recklessly or crookedly created debt, the borrower or the lender?

    Right off the bat I think everyone who is sympathetic to the plight of the Greek public would agree with what, no doubt, is your belief, the belief that throughout this process it has been “the lenders” who have had the more sophisticated understanding of what was unfolding on the way to where the situation is today than those who ultimately have been labeled as “the borrowers.” There’s also the reality that the European Central Bank chooses not to allow an inflation which is the monetary policy that would best serve Greece’s bid to become a more competitive economy within the EU, and in the rest of the global economy. Instead, the ECB has chosen to adopt a monetary policy that benefits certain members of the EU at the expense of the best interests of Greece. I don’t know why these simple concepts “seem so hard to understand.”

  13. Ian Welsh

    I had not read Harris, and I wasn’t quoting MFI. Beatings will continue is an expression used long before Harris, it is absolutely coincidence that we both used it on the same day.

    Well, it’s not coincidence, it’s because it seemed appropriate to both of us given what is being done to Greece.

    I am happy to credit people whose words I use, but I wasn’t using his.

    Source on “beatings will continue until morale improves”:

  14. Peter

    I thought this quote would be attributed to someone such as Blackadder or the Monty Python crew and the Firesigh Theater comes to mind through the fog of time.

  15. ah the old humur…

  16. Iii

    China’s not trying to tame the IMF. The recent moves the MSM has been fluffing as such really amount to going along with the same old ****, but dressed up a offering an alternative. The principle is similar to a company union.

  17. Hoarseface

    Can’t help but wonder… is there anything to support MFI’s characterization of Oliver Blanchard’s assumptions beyond MFI’s comment? He didn’t include a link to any statements, blog post or paper from Blanchard. Are we just taking MFI at his word on this?

  18. markfromireland

    @ Hoarseface. You could of course always try clicking the link to Blanchard’s blogpostings which I did in fact provide.


  19. Hoarseface

    MFI I did try the link above the assumptions you listed, it looked to me like the home page for his blog, and had a long list of recent articles. I didnt look through them very thoroughly, maybe it was pretty obvious and I didnt see what was right in front of me, but I was hoping to be taken directly to something where he was stating those assumptions.

    Im not trying to be contrary, its just the impression I had of Blanchard didnt jibe with what I read in your comment.

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