Just this month there has been a big debate on the size of the multiplier. People have been wondering why has the UK recovered even more slowly than the US, when the UK pursued austerity policies and cut their spending? Greece is even worse off having cutting deeply. Well the International Monetary Fund which has been recommending austerity all over the place has looked into the data an they found that
Blanchard has just revolutionized the academic debate about economic policy and the crisis. In the IMF's latest World Economic Outlook Blanchard and his team have come up with new research which convinces them that austerity is the wrong way to go....... the question Blanchard's team addressed was the affect of cuts in government spending on gross domestic product growth. We know that cuts will reduce output, since there will be less money in the hands of the public to buy products and thus less incentive for manufacturers to make more. But it is hard to calculate how much the knock-on effects of the cuts bite into growth.
This is called the fiscal multiplier. Usually, we try to calculate this another way, by asking how much extra growth will a certain amount of extra government spending produce.
For the past decade and more, the IMF (and almost all government economists around the world) have assumed that the multiplier effect of spending cuts is 0.5; that is to say, cut public spending $100 billion and you cut growth $50 billion.
The new IMF research says this was wrong, and the multiplier effect is much greater -- somewhere between 0.9 and 1.7. That means that cuts of $100 billion means growth reduced $90 billion-$170 billion.
Wow! If that is right, the IMF is saying that the more you cut government spending the more your overall output will shrink -- and you will never get out of the hole. Your economic output just continues to decline, which is precisely what we have seen happening in Greece.