Ireland Is Not An Example Of Expansionary Austerity

Europe is in the grip of austerity fever where all governments are convinced that reducing the budget deficit must be their main priority. However, despite the strong consensus, little thought has been given to whether or not it will work. Some economists have proposed that austerity could improve the economy if businesses and consumers believe are impressed by the government’s action and begin spending of their own. This is called “expansionary austerity” or “expansionary fiscal contraction”. Subsequent research has discredited all examples of expansionary austerity, with Ireland in 1987 being the only exception. But Ireland is no poster child for austerity, but just another example of the harm it does. Continue reading “Ireland Is Not An Example Of Expansionary Austerity”

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Time To Bury The Ricardian Equivalence

There is a peculiar argument against stimulus called the Ricardian Equivalence. It argues that if individuals have rational expectations, then when the government gives the economy a boost during a recession by cutting taxes or deficit spending, individuals will know that this deficit will have to be paid off at a later date and therefore the extra money will merely increase savings. This increase in saving will cancel out any stimulating effect the deficit might have. In other words it doesn’t matter whether taxes are raised now or later, the effect will be the same. In 2010, the President of the European Central Bank, Jean-Claude Trichet and current head of the IMF, Christine Lagarde both mentioned the Ricardian Equivalence as a reason why they didn’t support a stimulus. Continue reading “Time To Bury The Ricardian Equivalence”