Alberto Alesina is a professor of economics at Harvard University Department of economics
He published numerous articles arguing that the fiscal contraction can be expansionary even in the short run.
Particularly “Large Changes in Fiscal Policy: Taxes Versus Spending” 2010
Alberto Alesina, Silvia Ardagna
Chapter in NBER book Tax Policy and the Economy, Volume 24 (2010), Jeffrey R. Brown, editor (p. 35 – 68)
Conference held September 24, 2009
Published in August 2010 by The University of Chicago Press
© 2010 by the National Bureau of Economic Research
in The Tax Policy and the Economy Series
This idea has been termed ‘Expansionary Fiscal Contraction’ or ‘expansionary austerity’
The Expansionary Fiscal Contraction (EFC) hypothesis predicts that, under certain limited circumstances, a major reduction in government spending (such as austerity measures) that changes future expectations about taxes and government spending will expand private consumption, resulting in overall economic expansion.
This hypothesis was introduced by Francesco Giavazzi and Marco Pagano in 1990 in a paper that used the fiscal restructurings of Denmark and Ireland in the 1980s as examples.[1]
The concept that fiscal contraction can result in growth is commonly known as “expansionary austerity”.
Alberto Botta writes: The theory of ‘expansionary fiscal austerity’ as we currently know it emerged at the beginning of the 90s when some economists stated that, at least under certain conditions, discretionary expansionary fiscal policies may have non-Keynesian effects, since that they may prove to be ineffective to stimulate economic activity and, at the same time, they may put at risk the solidity of public finances and of the whole financial system of the economy (see Giavazzi and Pagano, 1990 and 1996; Alesina and Perotti, 1995; Alesina and Ardagna, 2010 and 2012)
Symmetrically those economists also argued through the analyses of some specific case studies that well-conceived fiscal restrictions might actually stimulate private consumption and investment expenditures, as well as improve export dynamics, so that the overall economic activity might eventually expand rather than contract (as stated by the standard Keynesian arguments
The Theoretical Weaknesses of the Expansionary Austerity Alberto Botta:
Robert Skidelsky writes :
In 2010 the doctrine of Expansionary Fiscal Contraction was highly influential in Europe’s finance ministries claiming that fiscal consolidation would cause output to grow by increasing confidence
It was said that the boost to confidence induced by a credible programme of deficit reduction would stimulate enough extra demand to more than offset any adverse effects of fiscal contraction
Alberto Alesina , the chief proponent of this , assured European finance ministers that ‘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’
A key point in his presentation was that spending cuts were more effective than tax increases
This argument was used by George Osborne in his 2010 budget . The emphasis was on spending cuts especially cuts to welfare and public sector employment
Following criticism of his methodology and findings by IMF and OECD staff , Alesina became considerably more circumspect
Since 2011 little has been heard of’ expansionary fiscal contraction’ We got the contraction but not the expansion . Skidelsky, Money and Government , Allen Lane, P231
Research carried out by the United Kingdom’s Office for Budget Responsibility [5] indicates that the austerity policies enacted in the United Kingdom had the effects of reducing the 2011-2012 economic growth by 1.4 percent.
references
