Fiscal austerity vs. expansionary fiscal policy: on the results of these opposed economic policies applied to fight recessions

ABSTRACT

This paper presents an inquiry into the observed results when governments have implemented one or other type of (opposed) economic policy prescribed in economics to reverse the consequences of a global economic crisis –like that unleashed in 2008–. An updated assessment of the evidence in this respect is developed, through a review of available empirical studies and analysis of the outcomes -in terms of recovery of economic activity- of having applied one and the other ‘competing’ economic policies. The approach focuses on the causal relationships involved, mainly between variations in public spending/fiscal deficit and changes in economic activity’s indicators.

KEYWORDS:

• Economic policies’ results
• global recession
• fiscal stimulus policies
• fiscal austerity policies
• public deficit management
• public debt management case studies
• econometric studies

JEL classification:

• E65
• E62
• H3
• E51
• H50
• C10
• A14

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Peter Coy, “What Good Are Economists Anyway?” Bloomberg Businessweek, 2009, April 15. (Coy was at the time President of Bloomberg).

2. Antón Costas (Universitat de Barcelona) “A lo único que debemos temer es al miedo”, El País, Negocios, 30/12/2012

3. Paul Krugman, The excel depression, The New York Times, April 18, Krugman (2013)

4. Reinhart moved to in mid-2020 she was appointed Chief Economist of the World Bank. Rogoff was Chief Economist of the IMF, in 2001–2003.

5. ‘European Union economic recovery package 2021-; by a total of €2.017.800 million; of which: “Next Generation EU Agreement”, € 806.900 million; to be financed by EU’s bonds issuance.

6. The usual mathematical expression for the multiplier is:

Although it is usual to simplify the calculation by assuming n→∞, in which case the expression comes limited to the first term.

According to the above example, the parameters’ values are:

s, propensity to spend, 0.9;

t, tax rate, on all new income generated, 0.14;

p, net purchasing power = 1-t = 0.86.

and n, number of cycles within the evaluation interval, (n  = 18 months/3 months = 6).

7. In general: ΔPS∙(m – 1) ∙t ; In the example: €500 M ^ₓ (3.47–1) ^ₓ 14/100 = €172.9 M

8. This briefing of the Keynesian standard explanatory model does not take into account the presence of a “European-type” social-security system. Thus, neither the impact on social contributions (a tax-revenue-like variable) nor that on unemployment benefits (an autonomous, automatic, public spending) – both related to the employment/unemployment level) – appear in the model.

9. “Government” is, however, the most usual term in papers and books in these cases; even though it is the State, the permanent entity, that gets indebted, not the changing body (the Government). A terminological tic that is certainly not unrelated to the underlying idea referred to at the beginning of the previous paragraph; in this case, to see the government as “the administrator of the national family”.

10. David Ricardo stated the theorem when referring to the two alternatives that a government has to finance extra spending that will imply a budget deficit of the same amount: to finance the deficit by taking a loan, instead of through an increase in taxes. In fact, years after having formulated it, Ricardo dismissed its theorem because it was unrealistic and was so forgotten, until the 1970s, when Robert J. Barro (University of; later at) recovered and updated it according to the modern neoclassical paradigm. Hence, it is also known as the “Barro-Ricardo theorem”; although the most common expression in textbooks keeps being “Ricardian equivalence theorem”.

11. In the formal-technical language on the topic, the issuance of money is expressed in terms of “Public Administration (the Treasury) request a loan from its Central Bank”. A loan of which the former (Treasury) will dispose of either in cash (notes and coins: issuance of money properly said) or, most often, simply through credit in its current account with the said Central/Issuer Bank.