Tuesday, 21 June 2011

Spending cuts, elections and the Great Recession

In a recent lecture at the Barcelona GSE, Prof. Alberto Alesina from Harvard University talked on the effect of fiscal policies on recovery from economic crisis and their effect on the electoral prospects of incumbent politicians. You can find the video of this very interesting lecture above these lines, but if you are to busy to watch it (and you trust me enough), I will summarize for you the two main points made by Prof. Alesina based on empirical data on previous economic crisis:
  1. Spending cuts are less contractionary and lead to more stable adjustments of debt and deficits than tax increases.
  2. Voters reward rather than punish governments who undertake fiscal reforms.
These findings have interesting implications on economic policy and political outcomes: Spending cuts probably are the right way to go and politicians have no reasons to be shortsighted; they should be brave and undertake deep economic adjustments and reforms. Good news for David Cameron, I guess. But Prof Alesina's results also open new questions and leave other unanswered. Spending cuts on what? Education? Health? Social Security? Are all of them equally virtuous? And secondly, what about tax evasion? In countries like the UK that may not be a big issue but in other like Spain or Italy it is. So, as we often say at the end of our academic papers, "further research is needed."

1 comment:

  1. But where's the morality?

    Let's remember that spending cuts are just taxes in reverse, which necessarily hit the poor hardest (since they depend upon state-supported services to the largest degree).

    It's not just the poor though, spending cuts such as Cameron's affect most of the population (the poor & lower middle class).

    If then we assume that voters will act rationally in their own interest, they would surely vote against such fiscal adjustment, and since they are the majority, a government advocating such a policy would not be elected.

    I would be suspicious about the degree of causality in his main points.