To Explain Why Expansionary Austerity Works

The current mantra is that austerity never does work. That the very idea of expansionary austerity is simply wrong.

That is, we should never try to get out of recessionary times by cutting spending – it doesn’t work.

The problem with this is twofold. The original work by Alesina et al never did say what it is said it did. And further, we’ve examples of that expansionary austerity working.

Here from Alesina’s paper:

This paper summarizes the results of a large recent literature
on multi year Öscal plans for deÖcit reduction (austerity).

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Monetary Montgolfiers

“There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation”

– Henry Hazlitt

Look at this from the Federal Reserve Bank of Dallas “Higher incomes and household wealth boost spending. Higher, real (inflation-adjusted) interest rates—which encourage consumers to save—reduce current spending”

So if what you want is more spending (higher aggregate demand) then higher incomes and household wealth is good, and higher real interest rates are bad.

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Politics Is The Very Reason Fiscal Policy Doesn’t Work In Recessions

It’s a delightful idea, that if we put all the wise people in a big room and get them to chew over society’s problems then they’ll come up with optimal solutions. Reality doesn’t quite work that way as every legislature on the planet shows us. So it is with this idea of Keynesian demand management. Our specific example being this idea that in a recession the government should go spend more so as to get us out of the recession.…

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It’s A Straight Choice – No Euro or Germany Pays Greek Pensions

This isn’t exactly what these federasts are saying here but it is what they mean. In jargon the eurozone is too large to be an optimal currency area so fiscal integration is needed. In vernacular we can say that either there’s no euro itself or Germany has to pay Greek pensions. For that’s what fiscal integration would mean down the road.

The underlying point is that monetary union means the same monetary policy everywhere. Has to, that’s just what it means.

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Paul Krugman’s Argument That Fiscal Policy Just Won’t Ever Work

This is not, of course, something that Paul Krugman would either ever say nor mean, that fiscal policy just won’t work as a macroeconomic policy. Yet it’s something that can be derived – with caveats – from what he’s just said.

To set the scene here. We’ve, largely enough and for the Lord’s Sake don’t get hung up on details here, two sets of macroeconomic policies. One is monetary, the other fiscal. Monetary talks about the quantity of money floating around, the interest rate which determines how the narrow money supply – that central bank money and cash etc – translates into the wider money supply of credit and bank accounts etc.…

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The Economic Revolution The United Kingdom Economy Requires

We have a call – nay an insistence – that there must be an economic revolution in the UK. For only then can we gain those things which are and should be the correct economic goals for us to be pursuing. This is according to the Senior Lecturer at Islington Technical College that is. The sadness of this call being that he’s not realised that the economic policy of the last few years is and has been delivering all of the things he demands.…

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The Truly Interesting Part Of Krugman’s “See, Told Ya!” Paper

We’re not great fans of macroeconomics around here, being of the opinion that this is the half of the subject we know humans are wrong about. Still, it’s worth keeping an eye on what’s being said over in La La Land simply because so many politicians believe this stuff.

At which point Paul Krugman’s new paper. Which could, possibly should, be summed up as “Told Ya So!” Reasonably fairly in fact, because he did rather predict what would happen, before it happened, during the crash.…

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