“I completely agree with everything you say”

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.

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31 Responses to “I completely agree with everything you say”

  1. JamesK says:

    Congratulations and it sounds hopeful Steve.

    It’s good that u didn’t share ur ‘analyses’ of the US presidential elections, GOP and general this year with Alberto.

  2. Jim Rose says:

    Well done Steve,

    Alberto Alesina’s views flow from the permanent income hypothesis and Ricardian equivalence in the sense that people consumer out of some long-run forecast of their after-tax income.

    Some say that these income and tax liability forecasts may be in error. True, but there is no reason to think that people always systematically under-estimate future tax liabilities.

    If people over-estimate future tax liabilities, budget deficits are contractionary.

    A fiscal adjustment, by removing fear of future harsher ones and future taxes, can stabilise expectations, increase consumers’ expected disposable income, and increase confidence of investors and therefore can stimulate private demand.

    Another reason may be that raising taxes would have negative supply-side effects on labour costs, labour supply, and investments. These supply-side effects do not apply to spending cuts, which, on the contrary, imply lower taxes in the future.

  3. Elizabeth (Lizzie) B. says:

    Congratulations Steve. That sounds like a very successful outcome for a conference paper, knees notwithstanding, which has drawn the right sort of attention to your book from the man who counts. I totally agree with you. It seems to me axiomatic that only value-added production can create real growth, although I can’t contribute anything regarding the time frames required – but then, I am not an economist of any sort, just an interested innocent bystander still learning.

  4. On your Marx says:

    pretty hopeless research.

    GDP growth fell after the Liberal’s government’s first budget and thereafter rose as the budget was put into a more sound position.

    Standard Keynesian policy actually.

    Actually most of his results reflect that as the IMF showed.

  5. Max Scream says:

    It seems everything stands or falls with the little word ‘mere’.

    The mere act of buying – what function is ‘mere’ playing here?

    If something is bought and its taken out of inventory, then there will be no economic growth.

    If nothing is bought inventory will never draw down and there well never be economic growth again.

    If enough stimulus/buying happens over a long enough time inventories will draw down and growth created.

    What does it matter who spends the money for growth to occur?

  6. Biota says:

    Simplistically, from a non-economist, how can the mere act of buying create jobs? Those that manufacture, distribute, market and sell to you already have jobs. Buying must simply maintain those jobs.

  7. Jim Rose says:

    On your Marx,
    remind me, what was the neo-keynesian explanation for the 1970s stagflation?

  8. sdfc says:

    The economy already had a fair bit of momentum by the time the budget cuts were made. Initial conditions matter.

    Let’s also not overlook the 250pts of rate cuts between July 1996 and July 1997.

  9. wreckage says:

    Perhaps commenters who want to get into a serious analysis of Alesina’s work might read it first?

  10. perturbed says:

    Here’s hoping you don’t get a review from him of the sort that Jack Ryan got from Captain Ramius in The Hunt for Red October. To wit:

    “Your conclusions were all wrong, Ryan – Halsey acted stupidly.”

    Sounds like you guys are on the same wavelength, though – hope things turn out well.

  11. sdfc says:

    Of course I’ve read it Wreckage which is how I know they don’t make the claims you seem to think they do.

  12. m0nty says:

    Alberto Alesina now has my book in his hands. What happens next, only time will tell.

    Maybe he’ll call you and you can go out for milkshakes. Then, if you’re lucky, he might ask you to go steady.

  13. wreckage says:

    they don’t make the claims you seem to think they do.

    Oh, I haven’t read them so I don’t have any ideas whatsoever. It’s just more fun watching you and, say, dot, fighting properly instead of calling each other dumb sluts and throwing broken bottles.

  14. wreckage says:

    Maybe he’ll call you and you can go out for milkshakes.

    That’s so cute.

    Then, if you’re lucky, he might ask you to go steady.

    Shit. It’s always about sex, m0nty.*

  15. m0nty says:

    Hey, nobody said Steve was that easy. First base only on a first date.

  16. Max Scream says:

    Business Week is unconvinced by Alesina, but right wing governments are buying:

    Alesina’s historical research, though, doesn’t shed much light on what might happen if the U.S. adopts an austerity budget, because current circumstances don’t resemble most of those in Alesina’s database. It’s rare for a nation to suffer such a big shortfall in demand that it cuts interest rates to zero, as the U.S. has. It’s even rarer for a government in such circumstances to tighten its fiscal belt. Japan’s experience is a cautionary tale. Japan attempted to tackle its deficit in the late 1990s during a period of weak demand and near-zero rates. Many economists say the move prolonged the slump that became known as Japan’s Lost Decade. To be sure, Japan tried to balance its budget mainly by raising taxes, which is not Alesina’s preferred solution.

    Economists who describe themselves as Keynesians or neo-Keynesians don’t buy Alesina’s medicine. Gauti B. Eggertsson, a staff economist at the Federal Reserve Bank of New York, concluded in a paper last November that, with interest rates at zero, the right remedy is to raise government spending, not cut it. Espousing his own views and not those of the Fed, Eggertsson wrote that when extremely loose monetary policy isn’t stimulative enough, “the goal of policy should be to increase aggregate demand—the overall level of spending in the economy.”

    Alesina’s own research shows mixed results from deficit-cutting. He identified 26 examples since 1980 of deficit reductions that triggered growth of gross domestic product and 21 that lowered government debt substantially. He found only nine double victories in which government policymakers managed both to expand their economies and reduce debt. (Among them: Ireland in 2000, and the Netherlands and Norway in 2006).

    Alesina is unfazed. While acknowledging that experience with zero-rate situations is scant, he says, “I don’t see how anyone can argue that we should push even more on the fiscal accelerator.” He says the greatest risk to global growth is a financial crisis brought on by fears of government overindebtedness.

  17. Max Scream says:

    I find it difficult to believe that you can spin an economic theory based solely on historical analyses. Look at the completely speculative nature of the conclusions that these supposedly historical analyses lead to:

    How can spending cuts be expansionary? First, they signal that tax increases will not occur in the future, or that if they do they will be smaller. A credible plan to reduce government outlays significantly changes expectations of future tax liabilities.

    This, in turn, shifts people’s behavior. Consumers and especially investors are more willing to spend if they expect that spending and taxes will remain limited over a sustained period of time. On the other hand, fiscal adjustments based on tax increases reduce consumers’ disposable income and reduce incentives for productivity.

    American firms today are profitable and have large unspent resources. But their uncertainty over regulation and taxes discourages them from risk-taking, investment and consumption. In Europe, governments would strengthen the banking sector if they cut spending and reduced their default risk. This, in turn, would ease the flow of credit into the private sector.

    The composition of fiscal adjustments is therefore critical. Based on what we know, the U.S. and Europe are currently at greater risk from increased stimulus spending than from gradual but credible spending cuts.

    i. De-regulation agenda is presented as the solution to our problems when it caused the GFC in the first place.

    2. Gradual spending cuts are not the norm in right wing circles.

  18. Abu Chowdah says:

    You’re an arsehole Monty. A petty, insignificant and jealous arsehole.

  19. JC says:

    Isn’t he just. Bob is no better either.

  20. Max Scream says:

    Two trolls came out to play. Both had nothing to say.

  21. JC says:


    There is no point arguing with you, as your stuff is basically third rate sludge.

    You pick up a biased report and post here expecting us to respond to it when in fact if you look through the sites data base there are numerous responses to the third rate sludge you posted.

    You post other incoherent crap that’s also jaw dropping.

  22. Abu Chowdah says:

    Max, you’re an apparatchik chronicler and peddler of shitty left wing fantasies. You’re a piece of human excrement. I saw you get out of a cab in Sydney a few years ago and was shocked at the post-mortem pallor of your jowelly morbidity. Have you also rooted Bob Brown in between leg overs with wives of past mates? Maybe it’s Hep-C that explains your jaundice?

    You’re a third rate hack writer who has risen to the top of a shallow gene pool so I don’t blame you for mooning around here making cow eyes at your intellectual superiors. The quality of your followers at your blog is hilarious and pathetic. You’re the messiah for damaged people, most probably all posting from the day room at the gladesville asylum.

    It’s good that your kids have been indoctrinated. To wake up and realize that a fat arse toxic clown like you is your father would be a tipping edge moment for those vulnerable to thoughts of suicide.

    Goodnight, you faaat cuuuuuunt.

  23. wreckage says:

    De-regulation agenda is presented as the solution to our problems when it caused the GFC in the first place.

    There are people out there who still have the chutzpah to try this on. Good on them! Very brave.

  24. Rafe says:

    Why this persisting talk about austerity, it is just about living within our means. How hard is that for Keynesians to understand?

  25. m0nty says:

    You’re an arsehole Monty. A petty, insignificant and jealous arsehole.

    Hey now Abu, I’m not going to come between Steve the hormonal tween and his schoolgirl crush on the swarthy teacher. Good luck to them, I say. It’s legal in most jurisdictions, after all.

  26. That’s funny. Abu loses it in a major way when Max cut and pasted something that was actually highly relevant to the argument.

  27. Capitalist Piggy says:

    John Taylor shows that the Congressional Budget Office models assume that debt reduction (austerity) leads to stronger economic growth.

  28. JC says:


    We’ve seen Ellis’ argument 100 times a week here by flaming Keynesian loons.

    That is, when rates get to zero bound you need “figscal” policy to set things right. It’s pure bullshit because it presupposes the central bank is unable to expand its balance sheet at zero interest rates.

    STFU as you are zero on this subject.

  29. Capitalist Piggy says:

    “Higher debt tends to imply lower output and income in the long run than does lower debt, because increased government borrowing generally draws money away from, or “crowds out,” private investment in productive capital.”

  30. Driftforge says:

    Would it be correct to say that a (imposed) change in consumption results in a time shift of production, whereas an (imposed) change in production results in a quantity shift in consumption?

    Is this a restatement of Say’s Law or are my thoughts off track here?

  31. Abu Chowdah says:

    While my response was not commensurate with that contribution, your reaction is disingenuous, Steve. As a pathological troll you know that it’s the death by a thousand cuts that kills with the most pain. In other words, your daily droppings grow inevitably into one enormous pile of shit.

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