When it Works and When it Doesn’t
Alberto Alesina, Carlo Favero, Francesco Giavazzi
Princeton University Press (£27)
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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.