So what is the problem? It’s threefold. First, the IMF and OECD are still really wedded to the idea of expansionary fiscal contraction. This is the notion that the economy always works at full capacity and that the state and private sector compete for scarce resources and that as the private sector supposedly always uses them better it must make sense to cut the state as this will boost growth. The argument is, of course, wrong.
Well, yes, it is wrong. Because that’s not what expansionary fiscal contraction is at all. What that idea is is that monetary policies, at least some of them, can be sufficiently expansionary that they can overcome the effect of fiscal contraction and thus we can indeed have fiscal contraction but also economic expansion.
It’s toss all to do with always being at full capacity nor even is it about private sector, government or crowding out.
For example, early 1930s, UK govt cut spending, put the budget into surplus, during a time of severe economic down turn. They also came off the gold standard and had a large fall in the value of the £. The monetary effects of the latter overcame the contractionary effects of the first and the downturn lasted about 18 months. about the best anyone was going to do in the circumstances.
Seriously, a professor, even a 0.2 of one, should know this stuff. Candidly.