Austerity vs Stimulus: The political future of Economic Recovery
Edited by Robert Skidelsky and Nicolò Fraccaroli
Ten years after the outbreak of the global financial crisis, a comprehensive debate of 'austerity' (reduction in public deficit) versus 'stimulus' (increase in public deficit) positions to foster economic growth, is timely and welcome.
This volume is edited by Robert Skidelsky (with Nicolò Fraccaroli), who is one of the key proponents of the stimulus side of the debate. Although the editors try to present both sides and illustrate arguments for austerity as well as against it, the view that the austerity push has been discredited and stimulus is the key to economic recovery is the book’s main take-home message.
The book presents a series of essays on the politics as well as the economics of the debate, taking the readers through the crucial post-financial crisis years and the ideology of austerity. The short essays are supplemented by some editorial narrative to bind them together – a peculiarity that enriches the appeal of a traditional edited volume.
Nonetheless, this style makes it difficult for the reader to distinguish between when the editors are expressing their own views or when they are merely reproducing published opinion pieces and offering an impartial commentary. The story they present is engaging, starting with the arguments behind the “expansionary fiscal contraction theory” put forward by Alberto Alesina and colleagues at Bocconi and Harvard universities.
The key point of this theory is that, during crisis times, restrictive fiscal policies (mainly a reduction in public spending) can have an expansionary effect on GDP by boosting the confidence of consumers, investors and markets. This view dominated the political debate, both in the UK and then in the eurozone, where governments set forth on the path of fiscal responsibility with big spending cuts. Fiscal adjustments, accompanied by expansionary monetary policy, were seen as the only way to restore markets’ confidence.
Nowadays, economists have little doubt about the economic damage wrought by austerity, including increased income inequality and reduced GDP growth. Therefore, why are (some) governments persevering with austerity policies? Voters have also started to voice their disapproval, evidenced by the rise of populist parties, promising a bigger role for the state. This volume does offer some insights on where next and although none of the contributions suggest uncontrolled public deficits, they strongly suggest the end of the austerity era.
Professor Barbara Casu Lukac is the director of the Centre for Banking Research at Cass Business School.