Is “austerity” a good thing?
Depends on how it is defined. Johan Norberg points out that spending restraint is the right approach.
Since I’m a fan of spending restraint, I obviously like the video.
But let’s expand on two points.
First, the definition of austerity is critical. Some fiscal policy folks (at the IMF and CBO, for instance) focus on deficits and debt. And this means they view spending restraint and tax increases as being equally desirable.
But that’s nonsense. As I’ve repeatedly explained, red ink is best viewed as a symptom. The real problem is excessive government spending.
Moreover, higher taxes usually exacerbate the spending problem since politicians can’t resist the temptation to spend at least a portion of any expected new revenue.
And since tax increases generally don’t collect as much money as politicians think they will, you can wind up with higher taxes, a bigger burden of government, and even higher levels of red ink!
Second, it doesn’t help to identify good policy if politicians think that’s a path to losing elections.
Which is why I want to highlight some new research published by the IMF.
The study, authored by Alberto Alesina, Gabriele Ciminelli, Davide Furceri, and Giorgio Saponaro, has some very encouraging results about tax increases being political poison.
Spending restraint, by contrast, is actually a political plus – at least when implemented by a right-leaning government.
Conventional wisdom holds that voters punish governments that implement fiscal austerity. Yet, most empirical studies, which rely on ex-post yearly austerity measures, do not find supportive evidence. This paper revisits the issue using action-based, real-time, ex-ante measures of fiscal austerity as well as a new database of changes in vote shares of incumbent parties. The analysis emphasizes the importance of the ‘how’—whether austerity is done via tax hikes or expenditure cuts—and the ‘who’—whether it is carried out by left- vs. right-leaning governments. Our main finding is that tax-based austerity carries large electoral costs, while the effect of expenditure-based consolidations depends on the political-leaning of the government. An austerity package worth 1% of GDP, carried out mostly through tax hikes, reduces the vote share of the leader’s party by about 7%. In contrast, expenditure-based austerity is detrimental for left- but beneficial for right-leaning governments.
For what it’s worth, this new research is an affirmation of my Fourth Theorem of Government.
This implies that Republicans should strive to control spending when they have power.
That’s certainly what happened under Reagan, and he then was reelected with a 49-state landslide.
But other Republicans didn’t learn any lessons from Reagan’s success. Both Bushes were big spenders, as was Trump.
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Image credit: Shaw Girl | CC BY-NC-ND 2.0.
