Alesina and the deficit mania — poor research

18 Mar, 2015 at 13:34 | Posted in Economics | 1 Comment

The obsession with government budget deficits since the crisis of 2008 and the subsequent recession illustrates the damage done by mistaken economic ideas. In the rich West, tens of millions of people lost jobs that could have been saved …

81peE0DWJoLThe media focused on the politics of the budget debate, but economic ideas had a central role in the outcome. Believers in Say’s law predominated … The most prominent research was led by Alberto Alesina of Harvard University, where conservative economists had displaced much of the formerly pro-government liberal faculty of the 1960s … Cut deficits, went Alesina’s argument, and you will restore the business confidence to invest fully the excess savings; spending cuts were more effective than tax increases in reducing deficits.

Alesina’s research was poor. Most important, his analysis, which started in the early 1990s, didn’t distinguish the economic conditions under which austerity policies were adopted. Essentially, Alesina’s optimistic conclusions about austerity expansions applied only when economies were already strengthening or their currencies were falling in value sufficiently to spur export — conditions not applicable to either the United States or most of Europe.

1 Comment

  1. “Most important, his analysis, which started in the early 1990s, didn’t distinguish the economic conditions under which austerity policies were adopted.”

    Don’t people read Genesis anymore? The Seven Fat Years and the Seven Lean Years?


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