Great recession, greater illusions

which mainly went to creditors.

Economists’ complicity Misleading, ideologically-driven empirical analyses claimed to support the new policy reversal. Alesina and his associates promoted the idea of “expansionary fiscal consolidation”, that contractionary government expenditure cuts would be more than offset by private spending expansion due to boosted investor confidence.

Then, Reinhart and Rogoff exaggerated the dangers of domestic debt accumulation.

Although soon exposed for major methodological flaws and suppressing relevant information, these studies had served their purpose.

The IMF Fiscal Monitor ahead of the June 2010 G20 Summit grossly exaggerated public debt’s destabilising effects, advocating rapid fiscal consolidation instead.

Later, the IMF admitted it had underestimated the fiscal multiplier and hence potential growth from such debt!

Faltering recovery and rising unemployment in the Eurozone caused the public debt-GDP ratio to rise instead.

Meanwhile, supposedly unavoidable short-term pain caused prolonged suffering for millions without the promised mediumand long-term gains.

UN ahead of the curve Besides the Bank of International Settlements’ legendary William White, the United Nations was ahead of the curve, not only in warning of the impending crisis, but also by providing appropriate policy advice, albeit largely ignored.

For example, the United Nations 2006 and 2007 World Economic Situation and Prospects (WESP) warned of instability and growth slowdowns due to disorderly adjustment of growing macroeconomic imbalances among major world economies. WESP warned that falling US house prices could cause defaults to spike, triggering bank crises.

The IMF and Organisation for Economic Co-operation and Development simply ignored such warnings, projecting rosy futures, and a “soft landing” at worst. The April 2007 IMF World Economic Outlook (WEO) emphatically dismissed widely held concerns about disorderly unwinding of global imbalances, claiming economic risks had subsided. The July 2007 issue claimed: “The strong global expansion is continuing, and projections for global growth in both 2007 and 2008 have been revised up.”

The OECD June 2007 Economic Outlook insisted that the US slowdown was not heralding a period of worldwide economic weakness. “Rather, a ‘smooth’ rebalancing was to be expected, with Europe taking over the baton from the US in driving OECD growth … Indeed, the current economic situation is in many ways better than what we have experienced in years.”

Although the IMF’s November 2008 WEO belatedly acknowledged the crisis’ severity, it forecast global recovery of 2.2% in 2009, suggesting the worst was over, thus supporting the reversal from fiscal expansion to consolidation. Depicting the “green shoots” of recovery as self-sustaining, fiscal stimulus was abandoned after selective financial bailouts.

The IMF and OECD recommendations of structural reforms and fiscal consolidation have since failed to provide the long awaited, sustained global economic recovery.

The president of the UN General Assembly set up a commission led by Nobel laureate Joseph Stiglitz to study the crisis’ impact, especially for development, and recommend policies to prevent future crises. Yet, most remain unaware of its wide-ranging findings and policy recommendations, including international financial architecture reforms and re-regulating finance to better serve the real economy.

The UN secretary-general proposed a