And when you bear in mind that the Very Serious People have been wrong about everything, that’s a very good thing. What’s even better is that as the chief economist at the IMF, he’s helping make at least one international institution less austerity-mad than the others.
Blanchard’s blog post on what went wrong in 2011 is, in fact, totally sensible and on point.
Furthermore, if I am reading it right, it contains something of a bombshell:
• Third, financial investors are schizophrenic about fiscal consolidation and growth.
They react positively to news of fiscal consolidation, but then react negatively later, when consolidation leads to lower growth—which it often does. Some preliminary estimates that the IMF is working on suggest that it does not take large multipliers for the joint effects of fiscal consolidation and the implied lower growth to lead in the end to an increase, not a decrease, in risk spreads on government bonds. To the extent that governments feel they have to respond to markets, they may be induced to consolidate too fast, even from the narrow point of view of debt sustainability.
(My emphasis)
If I have this right, Olivier is suggesting that harsh austerity programs may be literally self-defeating, hurting the economy so much that they worsen fiscal prospects.
This in turn means that the analogy to medieval doctors who bled their patients, then bled them even more when the bleeding made them sicker, is exactly right: austerity reduces growth prospects, leading to calls for even more austerity.
Serious!