It is incredible the hold that mathematical modelling has over economic policy-making under neoliberal capitalism. This was the arcane and esoteric world that drove the brief ascendancy of toxic derivatives before they crashed and nearly brought down the global economy. More seriously still, these economic wizards who have until recently prided themselves as ‘the masters of the universe’ ran the IMF and forced developing countries and emerging markets into the straitjacket of their own learned theories, upholding the so-called Washington Consensus which all States should be compelled to follow. Until now. In an astonishing turnaround the IMF is now admitting it was all along – wrong. You wouldn’t guess it because the language is so wrapped in jargon as to be almost indecipherable. The fiscal multipliers, the IMF now confesses, are likely to have been higher than previously forecast.
The Office of Budget Responsibility, advising Osborne in his budget preparations, had assumed that the fiscal multiplier was 0.6. What this means is that if there were, say, a deficit reduction of £15bn, equal to 1% of national income, the fall in national income and therefore the limiting impact on growth would be only roughly half as much, i.e. deficit reduction is still compatible with growth. This is why the Tories were so confident that despite enormous cuts in public spending, growth would still emerge.
What a surprise it must be that they got their figures wrong. The IMF’s latest research now suggests that the fiscal multipliers might actually be between 0.9 and 1.7. In other words, at a minimum any deficit reduction has an almost equal impact in choking off growth, or has almost double its impact in suppressing growth. What an incredible discovery from these mathematical whizz-kids! Any first-year economics student could have told them that huge cuts in public expenditure, without any other countervailing stimulants, would obviously pull down demand and squeeze out growth.
The IMF and OBR have been so naive and foolish that one wonders whether they actually believed these counterfactuals themselves. Maybe the complex methodology is just a cover to advance their own prejudices, the IMF to enforce market disciplines on all applicants for its aid and the Tory government to have an excuse to shrink the State and eliminate the public sector. But could this ever have happened if Blair hadn’t betrayed the Labour Party into the hands of the market fundamentalists so that the one force which could have resisted and ultimately blocked this ideological marauding was (till now at least) neutered?