Expansionary Austerity?

by Paul Krugman

In today’s column I write about the way fear of invisible bond vigilantes is driving demands for austerity. I didn’t have space to deal with the other part of the austerity cult: the belief that the gods will reward austerity with economic expansion. But it’s equally unfounded in any actual evidence.

In a terrific new working paper, MIke Konczal and Arjun Jayadev look under the hood of an Alesina/Ardagna paper that is being widely cited as evidence that austerity will lead to growth. They look to see how many of the austerity -> growth episodes actually involve fiscal contraction in a slump. Here’s a comprehensive list of those cases:

Ireland 1987

And as I among others have noted, the things that drove Irish expansion — devaluation, a boom in its largest trading partner, and a sharp fall in interest rates — have no relevance to the United States today.

All of which goes to remind us with how little wisdom the world is governed.