Alberto Alesina and the theory of ‘expansionary austerity’

24 May, 2020 at 17:14 | Posted in Economics | 3 Comments

albAlberto Alesina, the prominent Harvard University economist and main architect behind the theory of ‘expansionary austerity,’ has died at age 63, Italian media reports today.

RIP.

As we all know there has been an obsession with government budget deficits since the crisis of 2008. Alesina’s ideas — mostly building on econometric analyses — about austerity expansion basically boils down to the hope that if you cut deficits, the confidence fairy will make business people invest.

No matter how much confidence you have in the policies pursued by authorities nowadays, it cannot turn bad austerity policies into good job-creating policies. Austerity measures and overzealous and simple-minded fixation on monetary measures and inflation ​are not what it takes to get our limping economies out of their present-day​ limbo. The austerity delusion simply does not get us out of the ‘magneto trouble’ — and neither does budget deficit discussions where economists and politicians seem to think that cutting government budgets would help us out of recessions and slumps. In a situation where monetary policies have​ become more and more decrepit, the solution is not fiscal austerity, but fiscal expansion!

austerity22We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces​ aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean​ increased deficits — and calls for even more austerity. And so on, and so on …

Economists have a tendency to get enthralled by their own theories and models, and forget that behind the figures and abstractions there is a real world with real people. Real people that have to pay dearly for fundamentally flawed doctrines and recommendations.

3 Comments

  1. Wasn’t Alesina just a convenient academic pawn used to provide expert cover for austerity policies that Germans had already decided upon? Meanwhile Japan continues to run huge fiscal deficits without predicted consequences. The idea that GDP growth is a desirable goal in the first place should be challenged. China is officially abandoning GDP targeting …

  2. Perhaps, no other economist in recent decades had damaged the world and the economics profession as Alesina with his so-called expansionary fiscal consolidation or austerity.
    In April (2010) in Madrid, he told the European Union’s economic and finance ministers that “large, credible and decisive” spending cuts to rescue budget deficits have frequently been followed by economic growth. Later in response to his critiques he said, “…sometimes, not always, some fiscal adjustments based upon spending cuts are not associated with economic downturns.” (‘My Answer to the Economist’ http://www.economics.harvard.edu/faculty/alesina/Alesina).
    It is also worth pointing out that the 2010 Madrid paper that summarizes the results of the 2009 paper does not specify the number – either in relative or absolute terms – of successful cases of fiscal adjustment. The paper also contains contradictory conclusions. For example, on page 3 it states, ‘Many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run’. While this is rather strong and hints causality, on page 5, it notes, ‘…In several episodes spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions’. This is much more modest with a focus on ‘association’ rather than ‘causality’. We know that ‘several’ is not the same as ‘many’. The 2010 paper does not allow the reader to judge whether to use ‘several’ or ‘many’ as the qualifier as the numbers are not given.
    This is particularly important because of the influence that the 2010 Madrid paper wielded in European policy-making circles. Had it been made explicit, and had it been made amply clear in media commentaries that one can detect an association (but not proven causality) between fiscal austerity and lack of economic downturns in a minority of cases, perhaps it would have discouraged confident proclamations by some policy-makers.

    For details, see my voxeu post (with Iyanatul Islam), “Revisiting the evidence on expansionary fiscal austerity: Alesina’s hour?” https://voxeu.org/debates/commentaries/revisiting-evidence-expansionary-fiscal-austerity-alesina-s-hour
    Also see my paper with (Iyanatul Islam) “The Debate on Expansionary Fiscal Consolidation: How Robust is the Evidence?”, The Economic and Labour Relations Review Vol. 23 No. 3, Sept. 2012, pp. 13–38


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