Dear God the man’s ignorant.
Get this, they didn’t even check Wikipedia, let alone any of the proper sources.
So, their paper says this about expansionary fiscal contraction:
The core argument for austerity economics as the harbinger of economic growth harks back to highly controversial proposals that originated in the 1990s known as ‘expansionary fiscal contraction.’ The idea behind these proposals is that the public and private sectors compete over the same pool of capital. It follows that if a policy of deliberate deflation in wages, prices and public spending through reduction in the state’s budgets, deficits and debts was pursued, then business confidence would be created as the foundation for growth. The state would no longer be ‘crowding out’ the private sector in a race to command scarce capital, resources or labour. The assumption is that private sector’s use of these resources (lower cost of capital, resources or labour) would result in higher growth than if they were used by the state (for discussion see: Barry & Devereux, 1995; Blyth, 2013).
Expansionary fiscal contraction theory is predicated, in other words, on three linked, but highly controversial assumptions: first, that there is a finite pool of available capital at a national level; second, that interest rates at national level are determined by a simple demand and supply curve; and third, that private sector investment (and correspondingly, debt) is always preferable to the public sector investment (and hence also debt).
No, that’s not expansionary fiscal contraction. That is what is known as the “German view”. And in that German view the crowding out argument only comes into play when he economy is at near full employment. so, they’ve entirely misunderstood the original argument. Even Wikipedia gets this right:
Expansionary fiscal contraction
From Wikipedia, the free encyclopedia
The Expansionary Fiscal Contraction (EFC) hypothesis predicts that, under certain limited circumstances, a major reduction in government spending that changes future expectations about taxes and government spending will expand private consumption, resulting in overall economic expansion. This hypothesis was introduced by Francesco Giavazzi and Marco Pagano in 1990 in a paper that used the fiscal restructurings of Denmark and Ireland in the 1980s as examples.
The concept that fiscal contraction can result in growth is commonly known as “expansionary austerity”.
The authors describe this as the “German view” of budget-cutting. The German view also includes the more traditional assumption that reducing government expenditures as a percent of GDP will lessen crowding out, making “room for the private sector to expand” which only operates when the economy is near full employment. The authors also did not provide a model for EFC but rather described conditions under which it was observed in Denmark from 1983–84 and Ireland from 1987–89, a period when the world was undergoing rapid interest rate declines and world wide growth. These conditions included a significant currency devaluation prior to assuming a peg against a stable currency (Germany in Denmark’s case), budget improvement through significant tax increases and spending cuts and sufficient liquidity that current disposable income did not constrain consumption. The authors stated that when current disposable income constrained consumption, “Keynesian textbook propositions seem to recover their predictive power, as witnessed by the 7% drop in real consumption in 1982 during the first Irish stabilization.”
Expansionary fiscal contraction is based upon fiscal contraction, sure, but depends for its effect on massive monetary stimulus through the decline in the exchange rate. And there’s really nothing at all very odd about this either. It’s what the UK did in the 1930s: cut government spending, reduce the budget deficit and at the same time come off the gold standard. Economy recovered damn pronto, hugely faster than the US at the time (18 months as opposed to 9 years). It’s what all of us have been saying should have happened in Greece: get out of the euro and devalue the drachma (not that you’d need to do much to make it devalue). It’s what the standard IMF view to do is: sort out the public finances, get a grip on spending and taxation and HAVE MONETARY STIMULUS THROUGH DEVALUATION you idiots!
Just a thought here, just a little suggestion, the merest hint of a soupcon of an indication. If you’re going to write a paper denouncing an economic theory wouldn’t it be useful if you already understood what the theory you’re denouncing says?
You realise that your tax money is now paying for this drivel?