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Uses—And Abuses —Of Austerity

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Uses—And Abuses —Of Austerity MONTAGE to the page in a way that felt compelling. “So much of climate change is a failure Uses—and Abuses of narrative,” she says. “When you talk to scientists, they say, ‘We haven’t found a narrative that connects with people —of Austerity enough.’ That’s what a writer is trying Economists revisit an unsettled economic policy. to do as well.” But as with other eternal by idreeS kahloon questions concerning mortality and how to cope with it, theater is the right vehi- cle, she says. “Because plays themselves reciouS few words in econom- as self-defeating, self-flagellating nonsense. are so temporary. And the moment we ics evoke emotional responses of any Ten years after the Great Recession pushed have with them is so fleeting, and it nev- kind. But austerity, the reduction of many European countries with precarious er comes back. That’s what’s so exciting P government deficits through tax in- finances to embrace austerity measures, the and precious about them to me. There’s creases or pared-down spending, is an ex- debate continues. something very resonant about looking ception. Discussions of austerity quickly And worse, it remains deeply unsettled. at how temporary and fragile everything devolve into moralizing—between support- Now Ropes professor of political economy is in the context of this made thing that ers, who see austerity as a kind of virtuous Alberto Alesina seeks to rectify that with his is here and then gone.” self-denial, and opponents, who portray it matter-of-factly titled Austerity: When It Works An Inclusive Academy: Achieving Di- fairs (Farrar, Straus and Giroux, $28). A can provoke discomfort (see Adam Kirsch’s versity and Excellence, by Ab igail J. critic of both “liberal hegemony” and the “Again, A Dangerous Art,” a review of Poems Stewart, Ph.D. ’75, and Virginia Valian (MIT, present moment of trashing international 1959-2009, November-December 2009, $29,95). Senior professors at the Univer- agreements and organizations willy-nilly, page 19); the publisher categorizes the latest sity of Michigan and Hunter College, re- Walt argues for foreign policy guided less work as adding “new music and menace to spectively, comprehensively review the by ambition and military prowess and more Seidel’s masterful body of work.” In the same research, and draw on their own experi- by the pursuit of peace, exemplary re- form, but from a different perspective, Mi- ences, to direct academic institutions to- straint, and the building of alliances. chael H. Levin, J.D. ’69, a lawyer and solar- ward realizing their aspirations for broad- energy developer, publishes Man Over- ening their faculties. Words & Works: Scenes from a Life board: New and Selected Poems in Architecture, 1948-2018, by Henry (Finishing Line Press, $14.99); their gentler A Few Thousand Dollars: Sparking N. Cobb ’47, M.Arch. ’49 (The Monacelli language often encompasses bracing, cur- Prosperity for Everyone, by Robert E. Press, $45). The acclaimed architect in his rent realities, too. Friedman ’71 (The New Press, $26.99). The own words. On the Center for Govern- founder of Prosperity Now (formerly the mental and International Studies, straddling Corporation for Enterprise Development) Cambridge Street (represented in hand- prescribes universal savings interventions some photographs here), he gracefully that would enable the most economically notes of the protracted back-and-forth with marginalized members of society to begin Cambridge neighbors and officials, “the to get a purchase on the levers that lead to extended negotiations and consequent re- an income—and everything that follows in considerations created opportunities that its wake—in a society where the wealth led to improvements in design.” gaps have become impossibly large. Peaches Goes It The Promise of Elsewhere, by Brad Alone, by Frederick Leithauser ’75, J.D. ’79 (Knopf, $26.95). Seidel ’57 (Farrar, The quietly prolific novelist and poet’s sev- Straus and Giroux, enteenth book: a comic novel about a stuck $24). New poems by middle-aged professor at a Midwestern col- a poet whose work lege whose tour of world architectural sites (his field) is deflected by a doomed ro- Architect and client: Henry Cobb mance. A journey about yearnings. presenting an early scheme for The Hell of Good Intentions: Ameri- Place Ville Marie to William Zecken- ca’s Foreign Policy Elite and the De- dorf Sr. in 1956— cline of U.S. Primacy, by Stephen M. aboard the FROM JOSEPH LEFT: MOLITOR COLLECTION, ARCHITECTURAL AVERY & FINE ARTS LIBRARY, COLUMBIA UNIVERSITY; LIBRARY OF CONGRESS Walt, Belfer professor of international af- latter’s DC-3 Harvard Magazine 63 Reprinted from Harvard Magazine. For more information, contact Harvard Magazine, Inc. at 617-495-5746 MONTAGE and When It Doesn’t, co-written with Carlo becomes income for individuals, who spend The underly- Austerity: When It Works and Favero and Francesco Giavazzi of Bocconi a portion of it, generating economic activity, ing reason, Alesina When It Doesn’t, by Alber- University. Their book focuses painstaking- which generates further activity, and so on. and his coauthors to Alesina, Carlo Favero, ly on proving a single proposition: auster- George Box, the great British statistician, explain, is investor and Francesco Giavazzi ity achieved through tax increases tends to once quipped that “all models are wrong but confidence. Imme- (Princeton, $35) trigger recessions and worsen a country’s some are useful.” Keynes’s basic model was diate tax increases debt load, whereas austerity accomplished certainly wrong—it did not consider the reduce the incentive for investment, while through government spending cuts has only supply side of the economy or the impor- spending cuts—especially to government a limited impact on economic output. tance of incentives. Later economists have programs with ever-inflating budgets— signal the possibility of eventual tax cuts. Relative to tax-based austerity, spending- based austerity spurs private investment and mitigates the recessionary result pre- dicted by Keynesians. The theory is con- troversial. Paul Krugman, a prominent and vitriolic critic of austerity programs, has pooh-poohed this explanation as belief in the “confidence fairy.” There are also more technical critiques of Alesina’s results. The relative outperfor- mance of spending-based austerity pro- grams could be explained by other factors. This is a central barrier to knowing anything with confidence in macroeconomics: experi- mental evidence is nonexistent. If monetary policy kicks in at the same time to stimu- late the economy through reduced interest rates or expansion of the money supply, then spending-based austerity might look better than it does. The International Monetary Fund made this point in a biting critique of If this doesn’t seem like a page-turner, updated the model to account for these de- Alesina’s work published in 2012. A weaker that’s because it isn’t. Among the general ficiencies, but their conclusions remain the currency, which promotes exports and thus public, only macroeconomic fiends will same: government spending should have a GDP growth, and labor-market reforms that pick it up—and even they might not. Ale- larger impact on output (i.e., be a larger “fis- often accompany austerity packages (such sina has advocated the central thesis for cal multiplier”) than taxes. as deregulating hiring and layoffs), could nearly a decade; his influential study on the The entire game in settling the debate lies also be influential factors. Alesina thinks topic (with then Harvard economist Silvia in figuring out the magnitude of these fiscal that none of these defeat his theory, but they Ardagna), published in October 2009 at the multipliers. Yet the repeated estimates put provide enough ammunition for skeptics height of the financial crisis, made much forth by economists on this fundamental who do not wish to be convinced. the same point. The analysis in the new number vary widely enough to allow indi- book is more rigorous—it rests on details viduals to continue believing what they wish. All thiS theoretical back-and-forth does of 200 austerity plans in 16 rich countries In Alesina’s analysis, a reduction in spending not change the fact that austerity is an un- before and after the financial crisis— but the ultimate finding is the same: In the fiscal-policy kit, austerity ought to be a rare belt-tightening through tax increases is ultimately much more painful than tool. Instead, it promises to become recurrent. slashing spending. That remains a provocative assertion be- on the order of 1 percent of gross domestic popular and dirty word. After the Great Re- cause it flies in the face of basic Keynesian product (GDP, the broadest measure of na- cession, Britain began a years-long austerity logic. That influential macroeconomic mod- tional output) is associated with a loss in program—slashing day-to-day departmen- el focuses on movements in aggregate de- GDP of less than 0.5 percent; a tax increase of tal spending by 16 percent per person—that mand—the total of public spending, con- similar magnitude tends to decrease GDP by 3 it is only now reversing. As Alesina and his sumption, investment, and net exports. percent—and the ensuing recession tends to colleagues recommend, David Cameron, Although higher taxes will reduce consump- last for several years. The differences matter the prime minister, and his chancellor of tion a bit, the theory predicts that reduced at times of economic stress or when policy- the exchequer, George Osborne, went the government spending has an outsize effect on makers try to rein in profligacy (in an attempt cut-spending route rather than the tax- the economy. Cash spent by public programs to stave off still worse depressions to come.) raising one. Indeed, the British experience 64 January - February 2019 Illustration by Matt Kenyon Reprinted from Harvard Magazine.
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