Has Austerity Been Vindicated? - Skidelsky (PS)

https://www.project-syndicate.org/commentary/budget-deficits-austerity-growth-alesina-keynes-by-robert-skidelsky-2019-05?utm_source=Project+Syndicate+Newsletter&utm_campaign=05153ce5b9-sunday_newsletter_26_5_2019&utm_medium=email&utm_term=0_73bad5b7d8-05153ce5b9-93854061&mc_cid=05153ce5b9&mc_eid=be3809ebbc



Alesina’s theory rests on two conceptual pillars. The main one is that if deficits persist, businesses and consumers will expect higher taxes and will therefore invest and consume less. Spending cuts, on the other hand, signal lower taxes in the future, and thus stimulate investment and consumption.

The second, supplementary pillar is the assumption that rising public debt leads investors to expect a default. This expectation forces up interest rates on government bonds, leading to higher overall borrowing costs. Austerity, by stopping the growth of debt, can bring about a “sizeable reduction” in interest rates, and thus enable increased investment.

...Keynes says an announced reduction in public spending signals to business people that their incomes will be reduced because fewer people will be buying the goods and services they produce. But Alesina says that an announced reduction in public spending signals to business people that they can expect lower taxes tomorrow, and therefore will spend more today.

Readers must decide which theory they find more plausible.