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The Austerity Chronicles

After years of mounting polemics against austerity policies, Keynesian dogma has become something close to a secular religion in popular economic-policy debates. But a new study of 16 advanced economies shows that, as with all dogmas, righteousness is no substitute for empirical facts.

CAMBRIDGE – In Austerity: When It Works and When It Doesn’t, the central conclusion reached by economists Alberto Alesina, Carlo Favero, and Francesco Giavazzi is one that most modern-day Keynesians and progressives will hate. In cases when circumstances have forced a country into fiscal retrenchment, the authors show, cutting government spending has cost less than tax increases in terms of foregone output and employment.

Readers should know that this is no ideological diatribe. Alesina, Favero, and Giavazzi have conducted cutting-edge empirical research on 16 advanced economies to draw lessons that could not have been garnered from analyzing any one country or episode in isolation. Austerity is a towering scholarly achievement, embodying decades of research and destined to serve as a touchstone for future studies – both by those who will build on it and by those who will try to tear it down.

In the very first line of their book, Alesina, Favero, and Giavazzi surpass the many blunderbusses that are published about austerity when they actually define the term. “Austerity,” they write, “indicates a policy of sizable reduction of government deficits and stabilization of government debt achieved by means of spending cuts or tax increases, or both.”