Incredible Turn of Events – International Monetary Fund to Admit It Was Wrong to Impose Austerity on Greece

IMF To Likely be Drummed Out of the “I am Always Right No Matter If I am Wrong” Club of Policy Makers in Europe

That the idea of contracting an economy through austerity in which taxes are raised and government spending is drastically cut will result in economic growth and expansion and a reduced budget deficit is so ludicrous that years from now future generations will wonder how anyone ever held such views.  But those who control economicpolicy in Europe and Britain do hold such views  and having the power in Europe to impose those views, they did.

Now after years of disaster in Greece, the IMF, one of the architects of the policy is apparently going to admit that it was wrong.

In an internal document marked "strictly confidential," the IMF said it badly underestimated the damage that its prescriptions of austerity would do to Greece's economy, which has been mired in recession for years. . . .

The IMF also said its own analysis of the future development of debt was wrong "by a large margin." The fund's debt-sustainability analysis—a critical piece of forecasting—"included stress tests but these turned out to be mild compared with actual outcomes."

The issue of the so-called fiscal multiplier—an estimate of how much an economy will contract for every euro in spending cuts or tax increases—has become part of the government's arsenal in its negotiations with the troika.

And in a development that ought to cheer Conservatives, Greece wants permission to cut some taxes, because raising them brought in less revenue.  This is exactly the point Conservatives make in the U. S., and while the point is not applicable to the U. S. economy because taxes on the wealthy are already at their lowest levels in decades and these are consumption taxes Greece wants to cut, not income taxes on the wealthy, apparently it is relevant in Greece.

In talks with visiting troika officials in Athens next week, Greece will ask for permission to cut certain value-added, or sales taxes, arguing that an increase in restaurant taxes, for example, has generated less revenue not more by crimping spending.

Conversely a cut in the tax rate for eateries, the government says, could actually boost revenue by drawing in more diners. So far, however, officials at the European Commission have been cool to the idea.

So in denying the request to cut the VAT, we see that an agency like the IMF that has made so many mistakes in the past is hardly likely to correct them in the future, even after they are forced to admit the facts that their policy has been woefully destructive rather than beneficial.

And the IMF needs to follow The Dismal Political Economist’s guide to what to do when you make a mistake.

1. Apologize
2. Try to repair the damage the mistake has done.
3. Try not to make the same mistake in the future

For Greece though, they won’t even get step 1.