I gave my presentation at the IAES Conference which was one of five papers in honour of Alberto Alesina and was why I had come to Istanbul. Alesina has provided empirical results showing that cuts to public spending in the midst of recession are associated with falling unemployment and rising economic growth, just as they were in Australia in 1996-97. He has done this kind of analysis across a wide range of OECD economies over a large number of years and has found this is the common result. Trying to balance a budget by raising taxes is found to make economic conditions worse.
This is, of course, a poisonous result for anyone using a standard Keynesian macro model. If you think in terms of Y=C+I+G, cutting G should lead to a fall in Y, that is, a fall in public spending should lead to a fall in GDP. It is a simple matter of arithmetic which Keynesians have substituted for economic analysis itself. As Alesina put it in his very carefully worded paper from 2010:
We uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.
Why this even might be the case is now a complete unknown to economic theory. As I pointed out at the start of my paper, this is the invisible statement, written on the top of every macro text in the world:
The mere act of buying will create economic growth and a net addition of jobs.
This is the Keynesian faith and it is shared by the 99% across the profession. But before Keynes there was a very different assumption made, and it was explicit, universally accepted by all economists, and this assumption read:
The mere act of buying will NEVER create economic growth and jobs.
Although not stated just like this by pre-Keynesian classical economists, that statement, that buying will never create jobs and growth, is Say’s Law. Only value adding production can create jobs and growth. Unproductive and economically wasteful forms of production cannot and do not. Which is why the stimulus has had a universally negative effect on economies across the world.
Alesina, in commenting on my paper said, and these were his words, “I completely agree with everything you say.” What more could I have hoped for. He has, however, interpreted Say’s Law as I presented it as a longish run relationship. But if he comes to see the longish run in the same way as I do, about half a year to a year out from the initial expenditure, then he and I will be in perfect accord.
But whatever time horizon one might have, why would you do something that makes things worse and ultimately requires everything that was done in the heat of the moment to be reversed?
I have therefore given him a copy of my Say’s Law and the Keynesian Revolution which he said he would read on the plane on the way back to Harvard. More than that I could not ask. But as I see it, it is only possible to understand why his empirical results are a theoretical certainty if one understands Say’s Law and the classical theory of the cycle.
Alberto Alesina now has my book in his hands. What happens next, only time will tell.