Just one post yesterday, “Night of the Living Alesina:”
Ah, remember the good old days of expansionary austerity? On both sides of the Atlantic, austerians seized on academic work by Alberto Alesina and Silvia Ardagna claiming that fiscal consolidation, if focused on spending cuts, would if anything lead to economic expansion. It wasn’t because the paper was especially compelling — even a quick look suggested that the methodology for identifying austerity was seriously flawed. But A-A told people what they wanted to hear, and they went with it.
Since then we’ve had what has to be one of the most decisive combinations of scholarly critique and real-world tests of an economic doctrine ever — and expansionary austerity has failed with flying colors. The IMF went about identifying austerity through an examination of actual policy, and A-A’s results were reversed. Critics showed that all of the alleged examples of expansion through austerity involved factors like currency depreciation or sharp falls in interest rates that don’t apply now. Osbornian policies in the UK led to stagnation; and in the euro area, well …
By the way, if you take out Greece, the result is pretty much the same, although the R-squared goes down.
So you might have expected austerians to change their minds, or at least to come up with other justifications. But no. Both David Cameron and Paul Ryan are still preaching that old expansionary austerity religion, confidence fairy and all.
This is, by the way, a fairly big deal for the Ryan budget, which actually produces a lot of front-loaded austerity, in part because it keeps the tax hikes that finance Obamacare while cancelling the Medicaid expansion and exchange subsidies. The result would be a lot of fiscal drag in 2014 and 2015 — years when the U.S. is very likely still to be in a liquidity trap, so multipliers will be large. This particular “Path to Prosperity” is, in the short to medium term, very much a path to continued depression.
Luckily it isn’t going to happen. And a quick read of reactions suggests that the new Ryan plan is being greeted with derision rather than adulation. Is our pundits learning? A bit, maybe.