Came across this blog post Jeff Frankel at Harvard who wants commentators to train their guns on Alesina and his co-authors for their work on ‘expansionary austerity’ rather than on Reinhart and Rogoff. Frankel, of course, concedes that even Alesina and his co-authors did not make extravagant claims about ‘expansionary austerity’ as headlines might suggest.
What is interesting to note is that Frankel notes that one of the co-authors of Alesina + has recanted:
Currency devaluation, reduced labor costs, and export stimulus played an important part in any instances of growth, for example, the touted stabilizations of Denmark and Ireland in the 1980s. His conclusions: “the notion of ‘expansionary fiscal austerity’ in the short run is probably an illusion: a trade-off does seem to exist between fiscal austerity and short-run growth” and so “the fiscal consolidations implemented by several European countries could well aggravate the recession” (2013b, p.10). To me, this is a more powerful indictment of the reasoning behind recent attempts at fiscal discipline during recession than is a spreadsheet error or a too-flippant line about Keynes’ sexuality.
One can understand that it is mighty difficult to isolate the effect of austerity or stimulus on short-run growth, given that a lot of other things go on in parallel such as currency devaluation, wage freeze, external demand, export stimulus, etc. It is rather obvious and yet, an obviously overlooked fact that ‘other things are simply not equal’ or ‘cannot be held constant’ in economics. That is why such policy prescriptions have to be made with a lot of care and humility.
[Policymakers too should be rather wary of going for the maximalist approach. Something, one must mention in passing, that Indian policymakers have been guilty of, with their various fiscal interventions and constitutional rights-based entitlement schemes].
This whole debate reminds one of blind men trying to feel an elephant. Sample this piece in Bloomberg, for example. The article states that the answer for the shortage of so-called ‘safe’ assets is to increase deficits and ‘crowd in’ private investment.
I am lost. In my book, one of the reasons why assets that were safe once are not safe any more is the size of the deficit. How would increasing the size of the deficits make them safe?
Second, ‘safe’ assets have no yield because central banks have boosted their prices beyond justification through their asset purchase programme. If they step back, their prices may find a more natural level, making their yields attractive. One does not have to increase the supply of safe assets to depress their prices. One can withdraw the artificial demand for them. Then, interest rates along the safety-risk curve will go up. Cost of capital will rise for businesses. The increase in pain will lead to invention and innovation as, after all, necessity is the mother of invention. One might add, she is the mother of innovation too.
Why do economists make thing so complicated or confusing? It is because economists allow ideology and their pet peeves to contaminate policy approaches. Feasibility, sustainability and efficacy should be the guiding principles of policy interventions rather than ideology.
The second best solution is, perhaps, even better: Economists should simply shut up.