Alberto Alesina Calls ‘Backsies’ On Expansionary Contraction

I’ve never heard of a person who approves of Italian economic policy or the Italian political class, so it should come us no surprise that the Berlusconi government’s fiscal consolidation package seems like a stinker or that Alberto Alesina and Francesco Giavazzi are able to pen a forceful and persuasive critique of it.

What’s interesting about the document, however, is that it represents an implicit recantation of Alesina’s previous association with the idea of expansionary fiscal contraction as the key to resolve recession-wracked government’s woes. His points about Italy, after all, are pretty basic. Alesina now thinks tax hikes are contractionary and that certain kinds of tax hikes are also bad for long-term growth. Alesina thinks that pro-growth structural reforms can boost long-term growth. Alesina thinks that some categories of government spending are wasteful and that other categories (pensions, for example) are not growth-enhancing even when they’re perfectly efficient. So Alesina thinks that a country faced with an objective need to close its budget deficit should do so by minimizing growth-stifling taxes and to “offset” the “negative effect on output” of spending cuts “by enacting structural, growth-enhancing measures.” This is all quite sensible, but indeed it’s sensible to the point of being utterly banal.

Now needless to say, if you think about a country you actually live in, you’ll find that there’s ferocious disagreement over questions like which spending programs are wasteful, which taxes are particularly damaging to growth, and which structural reforms are growth-enhancing. This is the stuff of which politics is made. The alleged point of the expansionary contraction intervention was to enter a second-order consideration into the picture in which fiscal austerity would be, as an independent matter, growth enhancing. But now suddenly when faced with an austerity program whose terms he doesn’t like, Alesina retreats to completely banal views.