Book of the week: does austerity work or not?

Book review: Austerity A look at a wide number of case studies to gauge the efficacy of various austerity programmes over the last four decades.

 

938-books-Austerity

AusterityWhen it Works and When it Doesn'tAlberto Alesina, Carlo Favero, Francesco GiavazziPrinceton University Press (£27)Buy on Amazon

At last October's Conservative conference, Theresa May formally declared austerity dead, nearly a decade after it began under Chancellor George Osborne. But with Brussels and Italy locked in an argument over the latter's deficit, the jury still seems very much out on how much and how deep governments should cut spending in order to balance the books. At the moment the consensus among economists seems to be that governments need to approach any fiscal consolidation with caution since they risk disrupting economic growth or making a recession worse, and should take care to balance spending cuts with tax increases. This book argues this approach is a mistake.

The authors think that the evidence of various austerity programmes over the last four decades suggests that the negative impact of economic austerity on growth has been exaggerated. While tax hikes can indeed be bad for the economy, cuts in public spending can actually boost economic growth, by increasing confidence among investors that spending is under control. What's more, austerity is far from the "political kiss of death" that many people believe it to be voters are willing to back a government with the "courage" to make difficult sacrifices to get a country's house in order.

The book is aimed at two audiences: professional economists and those with a more general interest in the subject. For the former, certain sections are stuffed full of charts and equations that the non-specialist may find offputting. Fortunately, these can be largely avoided by following the authors' recommendation to skip chapters five, six and nine. The remaining parts are written in a more accessible style, while providing enough information to enable the reader to understand the main thrust of the argument.

How well do the arguments stand up? The authors use a wide number of case studies, covering a large number of developed countries, to support their arguments. The problem is that these case studies aren't detailed enough to eliminate the possibility that other factors may have cushioned the effects of austerity.

For example, at the same time as it experimented with austerity in the 1990s, Canada got a major boost from agreeing the Nafta free-trade deal with the United States. The authors also admit that their model fails to explain why the cuts mandated by the International Monetary Fund, European Central Bank and the European Commission ended up being so disastrous for the Greek economy. Still, for all its flaws, this book is a useful contribution to an ongoing debate.

Recommended

My must-read of 2020: a page-turning biography of Keynes
Investment strategy

My must-read of 2020: a page-turning biography of Keynes

John Stepek recommends some of his favourite financial books for you to read as lockdowns continue, including a surprisingly gripping biography of the…
31 Dec 2020
Five books to put on your Christmas list
Investment strategy

Five books to put on your Christmas list

Even if they’ve done nothing else, lockdowns – in whatever guise – have given us plenty of time to read. Merryn Somerset Webb picks five books to enjo…
7 Dec 2020
Four excellent books to get your teeth into while you remain holed up
Books

Four excellent books to get your teeth into while you remain holed up

Whether you’re going on a staycation (or even an actual holiday) or remaining holed up at home. Merryn Somerset Webb has four perfect books to educate…
6 Jul 2020
Theatre review: The Visit
Films

Theatre review: The Visit

Friedrich Dürrenmatt's Swiss classic The Visit, transported to 1950s America, poses the question: how much would you kill for?
28 Feb 2020

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021