The Debate Over Austerity

• Date: 01 December 2014
• Published date: 01 December 2014
• DOI: http://doi.org/10.1111/infi.12052
• Author: Gernot J. Müller

REVIEW

The Debate Over Austerity

Gernot J. Müller

University of Bonn, Germany, and CEPR, London, UK

Alberto Alesina, and Francesco Giavazzi (eds). Fiscal Policy after the Financial

Crisis. Chicago: University of Chicago Press, 2013.

Mark Blyth. Austerit y: The Histor y of a Dangerous Idea. Oxford: Oxford Univer-

sity Press, 2013.

Suzanne J. Konzelmann (ed.). The Economics of Austerity. Cheltenham: Edward

Elgar, 2014.

I. Introduction

The debate on austerity –that is, measures to reduce government budget

deficits –is quite heated. Presumably this reflects a sense of urgency because

austerity policies are currently applied in many advanced economies. The

liveliness of the debate may also be due to a lack of conclusive research,

seemingly available in other areas of economic policy. Finally, and perhaps

most importantly, the debate touches on such fundamental issues as the role

of the state in capitalist societies and the appropriate degree of redistribution

within and across generations.

International Finance 17:3, 2014: pp. 403–418

DOI: 10.1111/infi.12052

© 2014 John Wiley & Sons, Ltd.

These are important insights, which emerge from the three timely con-

tributions that I review in what follows. The three books offer quite distinct

and complementary perspectives. Alberto Alesina and Francesco Giavazzi

present a broad collection of recent and original research papers at the

frontier of (mainstream) macroeconomics. Their volume includes, inter

alia, new estimates of so‐called ‘state‐dependent’fiscal multipliers, the long‐

run implications of implicit government liabilities and the electoral conse-

quences of fiscal adjustments. Mark Blyth’s essay attempts to outline the

intellectual history of austerity –‘a dangerous idea’–from John Locke to,

yes, Alberto Alesina. The essay complements this history with an account of

the recent financial crisis and actual austerity policies implemented during

the 20th century. Finally, Suzanne Konzelmann’s anthology presents a large

number of classic texts from Mandeville, Smith, Keynes and many others, as

well as more recent offerings. In addition, Alesina and Giavazzi as well as

Konzelmann provide detailed introductions to their collections highlighting

common themes and differences across their contributions. In doing so, they

toodevelopamarkedstandvis‐à‐vis current austerity policies.

Inmyreview,Iwillnotbeabletodojusticetotherichnessofthe

material, nor will I attempt to do so. Instead, I will bring to the fore the

complementarity of the perspectives by confronting each book with the same

set of questions. The first question asks: where do we stand in terms of

public finances and how did we get here? Since the level of public debt is

quite high by historical standards, the answer to the question may appear

straightforward. And yet, as it turns out, other defining aspects of the current

environment are mo re controversial, suc h as the maximum le vel of taxation

that can be extracted from an economy or the appropriate size of the welfare

state. Also, there is little doubt that the build‐up of public debt is to a

considerable extent a result of the global financial crisis, a point emphasized

by Blyth in particular. Still, in their introduction, Alesina and Giavazzi take a

more long‐term perspective on public debt, stressing the role of growth and

demographic trends.

The second question is: where do we go from here? When it comes to

assessing policy options, the controversy on auster ity gains furt her traction .

The questions of how and when to reduce the public debt are at the heart of

long‐standing debates that predate the recent crisis. These issues thus emerge

constantly, in various forms, in all three books.

All three books concede a certain discrepancy between what they consider

good policies and what they observe in place. Hence, the final question I will

pose is: why are current policies not appropriate? According to Blyth and

Konzelmann, we currently suffer from excessive austerity, while Alesina and

Giavazzi seem to suggest that there is too little of it. Of course, such

conflicting views cannot all be correct at the same time. In what follows,

404 Gernot J. Müller

© 2014 John Wiley & Sons, Ltd.