The crash of Austerity economics : Reality keeps contradicting the sponsors of economic pain, but they keep dispensing their perverse advice.

A decade ago, Alberto Alesina was one of the most influential economists in the world. His theory of “expansionary austerity”—the paradoxical notion that reducing public expenditure would lead to an increase in economic activity—was one of the hottest ideas in macroeconomics. He claimed to have shown that government surpluses could actually boost growth, but only if they were achieved via spending cuts rather than tax increases. At a moment when many governments were seeking Keynesian remedies to a global recession, his work (along with fellow Harvard economist Silvia Ardagna) reassured conservatives that there was no conflict between keeping up demand in a crisis and the longer-term goal of reining in the public sector. Not surprisingly, his ideas were taken up by right-wing politicians both in Europe and in the U.S., where he was widely cited by the Republicans who took control of the House in 2010. Along with the work of Carmen Reinhart and Kenneth Rogoff on the supposed dangers of excessive government debt, Alesina’s work provided one of the key intellectual props for the shift among elite policymakers toward fiscal consolidation and austerity

Strange defeat: How the new consensus in macroeconomics let austerity lose all the intellectual battles and still win the war

Macroeconomics in the United States today appears to be a site of intense controversy between supporters of more aggressive stimulus measures and supporters of austerity. These policy debates, while important, tend to obscure the strong methodological and theoretical consensus in the economics profession today. All major schools of mainstream macroeconomics are committed to a vision of the economy in which rational agents choose the optimal path over time, and in which any sources of instability are fully offset by a benevolent central bank, at least in normal times. These core intellectual commitments of modern economics have contributed to the weakness of efforts to reduce unemployment in the US and Europe. This paper first describes the intellectual failure of the most prominent arguments for austerity, and then argues that the deeper consensus in macroeconomics has nonetheless made it difficult to make consistent arguments for sustained deficit spending or for making lower unemployment a high priority relative to other macroeconomic goals

A response to waknis

We thank Parag Waknis for his comment. If nothing else, it succeeds – albeit unintentionally – in providing a fi ne illustration of the problems with contemporary economics that our article described. In our article, we suggested that the methodology that has dominated econo mics for the last generation leaves economists unequipped to make arguments for active macroeconomic policy. Since agents know the true parameters of the distribution of future outcomes and inter-temporally optimise at all points based on that, the link between current income and current expenditure, and the consequent centrality of aggregate demand are broken. The result of this approach is that recessions and periods of high unemployment are simply assumed to be the result of optimising choices on the part of agents. Waknis does not challenge the accuracy of this description of current economic practice; he just does not see anything wrong with it

Mapping India’s Finances 60 Years of Flow of Funds

As a useful adjunct to other macroeconomic accounts, this paper describes financial flows between different sectors of the Indian economy from 1955 to 2015. It finds that the consolidated government sector has the largest net deficit, while the households sector has the largest net surplus. The private corporate sector is running larger deficits than at any other time in the past, implying more reliance on external credits. With liberalisation and globalisation, the rest of the world sector is now the second-largest net surplus sector in the economy

The post-1980 debt disinflation: an exercise in historical accounting

The conventional division of household payment flows between consumption and saving is not suitable for investigating either the causes of changing household debt–income ratios, or the interaction of household debt with aggregate demand. To explain changes in household debt, it is necessary to use an accounting framework that isolates net credit-market flows to the household sector, and that takes account of changes in the debt–income ratio resulting from nominal income growth as well as from new borrowing. To understand the implications of changing household income and expenditure flows for aggregate demand, it is necessary to distinguish expenditures that contribute to demand from expenditures that do not. Applying a conceptually appropriate accounting framework to the historical data reveals that the rise in household leverage over the past 3 decades cannot be understood in terms of increased household borrowing. For both the decade of the 1980s and the full post-1980 period, rising household debt–income ratios are entirely explained by the rise in nominal interest rates relative to nominal income growth. The rise in household debt after 1980 is best thought of as a debt disinflation, analogous to the debt deflation of the 1930s

A response to waknis

We thank Parag Waknis for his comment. If nothing else, it succeeds – albeit unintentionally – in providing a fi ne illustration of the problems with contemporary economics that our article described. In our article, we suggested that the methodology that has dominated econo mics for the last generation leaves economists unequipped to make arguments for active macroeconomic policy. Since agents know the true parameters of the distribution of future outcomes and inter-temporally optimise at all points based on that, the link between current income and current expenditure, and the consequent centrality of aggregate demand are broken. The result of this approach is that recessions and periods of high unemployment are simply assumed to be the result of optimising choices on the part of agents. Waknis does not challenge the accuracy of this description of current economic practice; he just does not see anything wrong with it

Strange defeat: How the new consensus in macroeconomics let austerity lose all the intellectual battles and still win the war

Macroeconomics in the United States today appears to be a site of intense controversy between supporters of more aggressive stimulus measures and supporters of austerity. These policy debates, while important, tend to obscure the strong methodological and theoretical consensus in the economics profession today. All major schools of mainstream macroeconomics are committed to a vision of the economy in which rational agents choose the optimal path over time, and in which any sources of instability are fully offset by a benevolent central bank, at least in normal times. These core intellectual commitments of modern economics have contributed to the weakness of efforts to reduce unemployment in the US and Europe. This paper first describes the intellectual failure of the most prominent arguments for austerity, and then argues that the deeper consensus in macroeconomics has nonetheless made it difficult to make consistent arguments for sustained deficit spending or for making lower unemployment a high priority relative to other macroeconomic goals

Rethinking Supply Constraints

On December 2-3, PERI hosted a conference to explore the causes of this global inflation spike. Conference participants provided critical perspectives on the austerity macroeconomic policies being implemented globally to control inflation and proposed alternative policies capable of managing inflation without imposing austerity and rising mass unemployment. Below are an initial set of conference papers. We will continue to add to the remaining papers in the coming weeks