Keynesian and other liberal economists have been attacking various government’s “austerity” programs. They argue that to stimulate or speed up economic growth, governments should spend without as much regard for holding down budget deficits; many decry the Obama Democrats’ 2009 stimulus package as being too small.
But “austerity” is a label that can cover two different types of policies, as Tyler Cowen points out in his Marginal Revolution blog. One is to hold down spending. The other is to increase tax rates. Both types of policies tend to reduce government budget deficits.
But, as Cowen points out, Harvard economists Alberto Alesina and four co-authors point out in a September 2014 National Bureau of Economic Research paper entitled “Austerity 2009-2013” argue that those two policies have quite different effects. In summary, as they write in their abstract, quoted by Cowen, “Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large.” In other words, spending cuts (with taxes held down or reduced) tend to increase economic growth much more than tax increases (with spending maintained or increased).
This obviously isn’t the last word on the subject, as some of the acerbic comments to Cowen’s blog post indicate. And it may not even be the first word; Cowen believes the paper “will be ignored rather than responded to.” But his words that follow sound persuasive to me: “For a while now it has been the practice to criticize ‘austerity’ rather than to disaggregate the policies, or describe them with greater specificity, even though that is easy to do. And it is incorrect to describe this paper as defending austerity, rather I read it as being anti-tax hike, and suggesting that ‘austerity’ is not a very useful concept.”
