IMF: Austerity decreases wages and increases unemployment

Discussion in 'Economy' started by pgm, Sep 13, 2011.

  1. pgm
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    pgm Member

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    Finance & Development, September 2011 - Painful Medicine

    The IFM studied cases in which a government either cut spending or raised taxes in an effort to cut the deficit. They analyzed 173 instances in 17 advanced economies (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Sweden, United Kingdom, and the United States) over the past 30 years. The average size of these cuts were 1% of GDP a year.

    The study found that these efforts decreased wages by .6% and increased unemployment by almost .5 percentage points (i.e., if you have 9% unemployment, it would go to 9.5% unemployment). The effects lasted about two years with some improvement after. It is more pronounced on those unemployed for over 6 months (the long-term unemployed).

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    The research also finds that the best way to blunt this pain is by decreasing interest rates (monetary stimulus) and devaluing the currency to boost exports. Two examples of this are Ireland in 1987 and Italy in 1992. The IMF's models predict that in the case where interest rates are near zero and cannot be cut, the cost of austerity may be double on the unemployment rate.

    The IMF study does not discourage contraction (I don't see why it would, since that's been their prescription to the developing world since its start), but it says that governments need to be realistic about the reality that it will cause a short-term decline in employment and income. It says governments need to balance the reality that the economy will suffer with potential positives of reducing the deficit, such as bringing down interest rates and permitting cuts to distortionary taxes in the future (note, the IMF does not believe that all taxes are distortionary). It says if such cuts are deemed necessary, they should be approved now, but only reduce deficits in the future when the recovery is more robust.

    There is more in there about entitlements and income inequality, but I'll leave that reading for you.

    (I'm making a citation, because I had a copyright violation warning before:
    Ball, Laurence, Daniel Leigh, and Prakash Loungani. "Painful Medicine: Finance & Development, September 2011." IMF.org. International Monetary Fund, Sept. 2011. Web. 13 Sept. 2011. <http://www.imf.org/external/pubs/ft/fandd/2011/09/Ball.htm>.)

    From the website: Laurence Ball is Professor of Economics at Johns Hopkins University. Daniel Leigh is an Economist and Prakash Loungani is an Advisor, both in the IMF’s Research Department. This article draws on research one of the authors conducted jointly with Jaime Guajardo and Andrea Pescatori.
     
  2. Oddball
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    Oddball BANNED Supporting Member

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    IMF= International banksters.

    That'll happen when gubmint is pumping up wage and employment bubbles via bureaucracy.

    Let the moocher class go get real jobs.
     
  3. pgm
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    pgm Member

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    Are you saying that the government is supporting an employment bubble right now and the unemployment rate should actually be higher?

    Oh, here's the quote from the actual article, including the part that I left out about across-the-board spending reductions resulting from fiscal contraction:

     
  4. sparky
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    sparky VIP Member

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    partially right Oddone

    the banksters , as you put it (see how that got around?) entire goal is to crush labor

    which means YOU and I are the moocher class in their eyes

    ~S~
     
  5. Oddball
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    Oddball BANNED Supporting Member

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    Absolutely.

    Why is it you think that the poorly disguised "stimulus" bill went primarily to bail out state legislatures that had overspent?

    I'd give odds that we'd be better off had those states dumped agencies and bureaucrats to balance the books, and let those people go on unemployment until they could find productive work.
     
  6. 8537
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    8537 Senior Member

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    Can you explain the mechanism by which laying off all those people between mid 2009 and late 2010 would have made us "better off"?

    Would firms be more willing to hire if the unemployment rate was higher or something? Would higher unemployment expenses and lower incomes somehow make us better off?
     
  7. Oddball
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    Oddball BANNED Supporting Member

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    Fewer window-breaking bureaucracies and taxes dragging down the private sector = More resources for productive pursuits.
     
  8. 8537
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    More resources for productive pursuits? How would laying off state workers create more resources?

    and if companies are sitting on record reserves, why would adding to those reserves cause them to put resources towards productive pursuits for which there's no demand?
     
  9. Oddball
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    How does deficit spending, to keep the bureaucratic employment bubble pumped up, benefit anyone other than the bureaucrats?

    The companies are sitting on their reserves for good reason....The central planners would be best advised to give up their attempts and social and economic engineering.
     
  10. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    " The historical evidence also shows that fiscal consolidations based on spending cuts are less painful than those based on tax hikes. "

    From the IMF report, wonder if Obama has read this? BTW, how strange is it to lower the payroll tax on one hand and raise personal income taxes on the other, to the same people?
     

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