Austerity Now! Austerity Forever! (or not...)

Well, you could see this coming up 5th Avenue.  Oliver Blanchard, chief economist at the IMF (motto Austerity Will Cure What Ails Ya!) has a new paper out - Growth Forecast Errors and Fiscal Multipliers - which basically sez. "We Wuz Wrong".
Huh?
Well, if you recall the serious suffering going on in Europe over the last few years (Ireland, Greece, Spain, Portugal), the main thrust has been something along the lines of "Your economy is slowing down, so you need to enact serious budget cuts".  In the immortal words of Dalton, Pain Don't Hurt. (You have seen Road House, right? Greatest movie ever?)
The problem with this math as virtually everyone not in Germany, Britain, or the IMF has been pointing out is that

If
   - Your economy is shrinking, and
   - You cut government spending, and
   - You raise taxes
then
   - Your economy shrinks even more, and
   - More people end up out of jobs, and
   - You are in deeper shit

The "Economics-Speak" part here is what is called The Fiscal Multiplier, which is basically a fancy way of saying - How much does the economy grow by for each additional dollar of government spending?
The Austerity fanatics in Europe (as well as the wingnuts in the U.S.) claim that the Multiplier is < 1 (or even 0!), i.e., every additional dollar in government spending results in the economy shrinking. Or, to put it differently, if you cut the size of government your economy will grow faster (sound familiar?)***

To cut to the chase, Blanchard's paper can be summarized as "We thought the multiplier was 0.5, but it turns out that it is probably 1.5".  Or, to put it differently, "What we should have done was the exact opposite of everything we did in Europe over the last few years". 
I guess Pain does hurt after all.
As Emily Latella would put it


*** Yes, it is possible for this to happen. But it involves a country in very, very different circumstances than any of the ones in the U.S. or Europe.