Tuesday, 21 May 2013

Austerity again

Kruggers weighs in here on Austerity. He is responding somewhat to Jeffrey Frankel's piece ( which he kindly links.) ( please note both pieces will be in  Around The Traps on Friday).

As Kruggers says Frankel essentially attempts to dampen criticism of Reinhart and Rogoff ( see the Brad De Long link where he retorts Frankel on this) and says the real villain is Alesina.Now we have walked down this path before relating to Alesina and Ardgana.
They were blown out of the water by the IMF and in particular this  IMF working paper.

Neither A&A nor their Australian supporters have ever gone close to responding to these criticisms. Indeed last time I wrote of this the australian supporters clearly did not know about either  the IMF criticisms or those from the Roosevelt Institute led by Mike Konzal.

Frankel also links Perrotti recent papers in these area.
As I have noted before and Frankel now repeats Perotti was a co-author with Alesina in believing in expansionary austerity. He now has fully recanted and shows how it is wrong in theory and practice.
Frankel has a number of his papers linked for those interested.

In the end what do we know?
Keynes has been proven correct again when he said in 1936 Austerity is the correct policy only when times are good (or word to that effect.)

Let us go to Ireland to show this.

They have adopted Austerity three times (see IMF paper). It has succeeded only once.
It did for three reasons.
1) The Punt depreciated significantly
2) Their leading trading partner ( the UK) was in the midst of the "Lawson" boom
3) Interest rates were able to be cut a lot

If Austerity worked all the time then it would have worked all three times in Ireland. The fact it only worked when Keynes stated it would work says it all!