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Alberto Alesina and the theory of ‘expansionary austerity’

Summary:
Alberto Alesina, the prominent Harvard University economist and main architect behind the theory of ‘expansionary austerity,’ has died at age 63, Italian media reports today. RIP. As we all know there has been an obsession with government budget deficits since the crisis of 2008. Alesina’s ideas — mostly building on econometric analyses — about austerity expansion basically boils down to the hope that if you cut deficits, the confidence fairy will make business people invest. No matter how much confidence you have in the policies pursued by authorities nowadays, it cannot turn bad austerity policies into good job-creating policies. Austerity measures and overzealous and simple-minded fixation on monetary measures and inflation ​are not what it takes to get our limping

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Alberto Alesina and the theory of ‘expansionary austerity’Alberto Alesina, the prominent Harvard University economist and main architect behind the theory of ‘expansionary austerity,’ has died at age 63, Italian media reports today.

RIP.

As we all know there has been an obsession with government budget deficits since the crisis of 2008. Alesina’s ideas — mostly building on econometric analyses — about austerity expansion basically boils down to the hope that if you cut deficits, the confidence fairy will make business people invest.

No matter how much confidence you have in the policies pursued by authorities nowadays, it cannot turn bad austerity policies into good job-creating policies. Austerity measures and overzealous and simple-minded fixation on monetary measures and inflation ​are not what it takes to get our limping economies out of their present-day​ limbo. The austerity delusion simply does not get us out of the ‘magneto trouble’ — and neither does budget deficit discussions where economists and politicians seem to think that cutting government budgets would help us out of recessions and slumps. In a situation where monetary policies have​ become more and more decrepit, the solution is not fiscal austerity, but fiscal expansion!

Alberto Alesina and the theory of ‘expansionary austerity’We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces​ aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean​ increased deficits — and calls for even more austerity. And so on, and so on …

Economists have a tendency to get enthralled by their own theories and models, and forget that behind the figures and abstractions there is a real world with real people. Real people that have to pay dearly for fundamentally flawed doctrines and recommendations.

Lars Pålsson Syll
Professor at Malmö University. Primary research interest - the philosophy, history and methodology of economics.

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