Good news for me

Just arrived in the mail today:

Dear Dr. Kates,

Good news for you: your article “Alesina and the Keynesians: Austerity and Say’s Law” has now been published in the following paginated issue of Atlantic Economic Journal: Volume 40, Issue 4 (2012), Page 401-415

It is good news. It is a paper I presented in July at a symposium on the work of Alberto Alesina who has provided an immense amount of empirical evidence showing that cuts to public spending generally lead to recovery, and the turnaround is almost immediate. This is the abstract:

Alberto Alesina’s empirical work has led to re-examination of Keynesian theory and policy. His demonstration that reductions in public spending are often followed by improvements in economic conditions is a direct contradiction of modern macroeconomic theory, where increases in aggregate demand are seen as the most important precondition for recovery even where such increases in demand are unproductive in themselves and largely wasteful. The present paper suggests that the theoretical framework necessary to understand Alesina’s empirical results is embedded within the classical theory of the cycle which argues that only value adding production could lead to recovery. Most importantly, the paper argues that only through a correct understanding of Say’s Law of markets can Alesina’s empirical results be properly understood.

Then to underscore the same point, there was this article in The Washington Post today by Anne Applebaum comparing Latvia and Greece in their response to the global financial crisis.

Even within Europe, after all, perceptions of economic policy can vary a great deal, as a quick comparison of Latvia and Greece reveals. Recently, the former has received some well-earned attention for its successful pursuit of economic austerity. In the wake of the 2008 crash, the Latvian government slashed public spending, fired a third of its civil servants and reduced salaries of those remaining while refusing to inflate the currency. Gross domestic product declined dramatically, falling 24 percent in two years. And then the recovery began. The Latvian GDP is now growing at more than 5 percent, and the budget deficit has been dramatically reduced.

You could either quote Alesina or you could quote me if you are trying to make a forecast of the policy consequences of reducing unproductive public spending. But if you would like to understand why it happened and not just discover that A follows B on a regular basis where A is a cut to public spending and B is recovery, you really do need to understand Say’s Law and the pre-Keynesian theory of the cycle.

And beyond all this, today I was reading Paul Krugman’s quite interesting and sensible 1994 book on free trade, Pop Internationalism, when I came across this (and to understand Krugman’s point you need to know that Friedrich List was a nineteenth century economist who continually advocated trade protection):

The new cult of List bears an uncanny resemblance to the right-wing supply-siders’ canonization of the classical French economist Jean-Baptiste Say, who claimed that the economy as a whole could never suffer from the falls in aggregate demand that produce recessions.

Well I would claim the same: an economy as a whole cannot ever suffer from a fall in aggregate demand that produces a recession.

I would agree that a recession can cause a fall in aggregate demand – although that’s a very misleading way of phrasing what has happened which will get you into lots of trouble if you think along those lines in framing policy – but I have never seen a single instance where a fall in aggregate demand was the cause of a recession. It’s all about what’s the cause and what’s the effect.

Anyway, it is good news that my paper has now gone out in the world. I might just note that when I presented the paper, Alesina said to everyone who was there about what I had just said that “I agree with everything you say”. It’s a good paper and I commend it to anyone interested in such things.

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