Nothing in economics is more potent than a simple idea whose time has come. Illustrating this maxim, a three-page article in the IMF’s latest World Economic Outlook promises to have a greater effect on global economic policy than all of the interminable meetings held at the annual meetings of the IMF and the World Bank in Tokyo a week ago.
That article, written by IMF chief economist Olivier Blanchard and Daniel Leigh, presented evidence that the fiscal multiplier  in the advanced economies is considerably larger than had been assumed when fiscal austerity plans were set in train in most economies in 2010. The implication, if they are right, is that austerity is much more damging to output in the near term than was anticipated. As a result, the planned fiscal retrenchment could be hard to sustain in the next few years, not only in the eurozone but in the US and UK as well. In fact, we are already seeing signs of this in peripheral Europe and the UK. Read more