Alesina and co-authors respond on European fiscal austerity

They have a new NBER working paper on this topic, here is one key part of the abstract:

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

They also consider, and cannot reject, the possibility that the output declines of recent times were due to additional negative variables, such as credit crunches, rather than higher values for the fiscal multiplier.

I predict this paper will be ignored rather than responded to.  For a while now it has been the practice to criticize “austerity” rather than to disaggregate the policies, or describe them with greater specificity, even though that is easy to do.  And it is incorrect to describe this paper as defending austerity, rather I read it as being anti-tax hike, and suggesting that “austerity” is not a very useful concept.

There is an ungated version of the paper here.

Comments

austerity would be a useful concept, if only people would confine it to referring to cutting back on discretionary public spending, firing employees, withdrawing or cutting provision of services and other state activities - which is an instrument of policy- and keep it distinct from measures like the deficit - which are outcomes of policy. It does not even mean cutting back on total public spending, because, for example, savings from firing workers might be offset by rising welfare payments.

Seen in this light, if they really find good evidence that cuts in spending have had little effect on output, that really says something substantive that contradicts a big part of the Keynesian story as I understand it.

It's embarrassing that you're willing to link to someone who's among the most famous examples of spectacular, high-profile gibberish in the service of the incredibly vivid errors for which the science of economics is known, in recent memory. Economics needs to be a licensed profession specifically so that Alesina can have his license revoked. My god, Tyler Cowen. Have a sense of shame.

I was going to say the same thing. The IMF had earlier discredited their piece awhile back.

This morning I was doing some research on the history of austerity to prosperity memes, and ran across there work and the ensuing blistering criticism that ensued.

But, you can discover this for yourself. Here is a Congressional Research Service report on the Alesina - IMF studies entitled "Can Contractionary Fiscal Policies Be Expansionary"

http://fpc.state.gov/documents/organization/203731.pdf

There were apparently two other later IMF papers (July 2011 and 2012) Jamie Guajardo, There is also another study Nicoletta Battini "Successful Austerity in US, Europe and Japan" finding that austerity during a recession is twice as risky during a downturn than during an upturn. What happens is that you prolong the downturn.

You can find the sources, article and summaries in Austerity: The History of a Dangerous Idea by Brown University Prof Mark Blyth who summarizes the econ literature and cross country analyses.

their piece referred to an earlier piece.

From the Congressional Research Service on the earlier Alisena study and the IMF counter studies:

"The International Monetary Fund, however, correcting problems they perceived in the Alesina and Ardagna study, found spending cuts to be contractionary, consistent with mainstream views. Moreover, while the IMF found cuts in spending to have smaller effects than tax increases, those effects were generally ascribed to offsetting monetary policy which was more significant with spending cuts than tax increases.

The findings in the Alesina and Ardagna study that successful debt reductions were associated with higher growth when spending cuts were used was based on 9 observations out of 107 instances of deficit reduction, or less than 10% of the sample. In addition, most of the countries where debt reductions were successful were at or close to full employment, while the United States remains well below full employment, raising questions as to whether this evidence is applicable to current U.S. conditions. Thus, both methodological questions and questions of applicability to current circumstances can be raised for the Alesina and Ardagna, and similar, studies."

'My god, Tyler Cowen. Have a sense of shame.'

A sense of shame from the man who wrote this - 'Eugenics was a very popular idea with Progressives earlier in the twentieth century, and also with economists (in particular, pdf), and ultimately the Nazi connection will be seen as a bump in the road.' http://marginalrevolution.com/marginalrevolution/2013/10/further-small-steps-toward-designer-babies.html

Not a chance.

For context, Tyler says: "My view has long been that most people, if they have the chance, are willing to embrace and also use eugenics, albeit with some reframing and rebranding. ... I am more skeptical myself, as I see greater value in the genetic outliers and I fear their disappearance or diminution." What do you find shameful? The fact that Tyler thinks that lots of people are pro-eugenic? Or the fact that Tyler is not?

He mentioned eugenics without sputtering denouncement of the Evil Ones, so SHAME SHAME SHAME on him.

I think your critique would be more effectively leveled at GOP and various right wing think tanks which almost exclusively use these vivid errors to produce policy advice using 1st and 2nd year "logic".

Is Alesina trying to recover his lost credibility by doubling down?

I suspect that those prone to criticizing austerity policies are also more accepting of tax hikes than the general public. So, I would suspect that this paper will probably draw some ire rather than just be ignored.

It's at least as likely that people (say, Republican political advocates in the U.S.) will cite this article as proving that more tax cuts are required to keep the U.S. from the Eurozone's fate. Anti-"austerity" crowd not the only folks likely to misread or overread.

"Out of sample simulations, that project output growth conditional only upon the fiscal plans implemented since 2009 do reasonably well in predicting the total output fluctuations of the countries in our sample over the years 2010-13 and are also capable of explaining some of the cross-country heterogeneity in this variable"

Do they have proofreading and/or a style guide?

That was a mouthful, but if you put a comma after 2009 in the first line, it becomes more understandable.

The utility of the word "austerity" is turn indignation against taxes raises into support for "leftist" policies.

Exactly, except that anti-austerians are really all for as much tax increase as they can get away with.

Speaking of disaggregating the effects of the policies (follow the links in the article to individual country examples).... It's nice to see someone following up our suggestion to study the issue further!

How many of you realize that this paper simply shows that the following two statements are not equivalent? (Shame on you if you don't know this and claim to be an economist):

Putatively equivalent statements:

1) A tax increase, X1, is the same as a cut in government fiscal spending, Y1

2) A tax decrease, X2 is the same as a rise in government fiscal spending Y2

What the Italians are showing is that the two statements are not equal, contrary to 'conventional Keynesian or economic wisdom' hence X1 != Y1 and X2 != Y2. This is because government is less efficient than private citizens, and there's less waste and hysteresis with private citizens spending money as they see fit.

Hence it's a good paper and has nothing to do with their earlier, discredited paper. You're welcome. Using my steel trap logical mind so you don't have to.

Ray, The effect of a tax cut or tax increase is conditional on the overall state of the economy at the time it is made. Moreover, At certain times (guess when) the private sector is unwilling to spend.

@Bill - thanks Bill. You're somewhat wrong, since now you're talking about liquidity trap and such. I'm making a more general point.

So, you're wrong and I'm right during a recession, but I'm wrong about the stimulative effect of a tax cut at full employment when you want to do a tax cut to further stimulate the economy and cause inflation .

Got it.

Based on my experience consulting to state and local governments, most agencies by 2008 had opportunities for operational cost savings in the 10% - 20% range through improved processes and technology, while providing the same or better levels. The financial crisis provided the spur to achieve these savings, and they are largely reflected in the declining payrolls of state and government agencies since then. An increase in revenues would not have achieved the same result. To me, this paper is a statement of the obvious.

Put simply, state and local governments have higher output than they did 6 years ago. This benefits the economy, and should be framed as a "win-win" for left and right. Left gets more government services, right gets to hold the line on spending. What's not to like?

@Bob Knaus - from the Abstract, that's not what the paper is saying. See my comment upstream. But thanks for your insight. Actually, re your point, there's a line of reasoning that every corporation, private or public, is overstaffed and full of seeming inefficiency, so they can "promote from within" when they need to fill a vacancy, since the theory goes it's less costly to do so than hiring an outside candidate (dubious but then again the Theory of the Firm predicts a certain amount of this kind of inefficiency). In short, fat is 'normal' in any corporation. The junk bond king Mike Milken used this insight to his advantage, as did the greenmailers of the 1980s, when they did LBOs and corporate raiding. The status quo considered it "unfair" for Milken et al to go after fat, since this fat was "normal" (see above), hence blowback did in Mr. Milken, nailed on stock parking technicalities after prosecutors played hardball (see the book by an economist and lawyer: Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution – 1995 by Daniel R. Fischel) You are welcome. Using my steel trap logical mind so you don’t have to. I'm good.

If your salary is based on the number of workers under you, it matters.

Yeah, I'm sure that the most efficient and effective plan was chosen during the crisis of the Great Recession. And, with their budgets cut, I;m sure they went out and bought new technology.

Nope, buy it as a service.

Higher taxes = good, lower public expenditure = bad; that's the dogmatic socialist's way of thinking.

In fact, there has been hardly any austerity in Europe during the recent years.
http://www.devilsdictionaries.com/blog/surely-you-must-be-joking-professor-stiglitz

Stop a random person on the street and ask them if more money should be spent on say, "HEALTH" or perhaps, "HOMELESSNESS", they'll earnestly say 'oh yes, yes". Ask them how much is currently being spent on that thing and they won't have a clue. All they know is that more is ever needed. If you disagree you literally want more people to suffer and have no homes.

Wow. That proves that the Nobel prize is a contrary indicator.

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