The articles up to now have tried to frame the debate about fiscal policy, both by outlining the arguments for and against an increase in public expenditures, and by presenting the huge problems that concern the interpretation of the empirical evidence. Continue Reading

The arguments presented in the articles up to now have shown us that when it comes to fiscal policy, economists are generally divided into two opposing camps. The question that naturally follows is: what does the evidence say?

As it often happens in economics, clear-cut answers are not that easy to reach. Two recent papers by Alesina, Favero and Giavazzi (AFG), and by Batini, Callegari and Melina (BCM) provide us with a case in point. Both groups of authors try to shed light on the impact of an event of fiscal consolidation on GDP growth. After reading the papers, however, one cannot but be puzzled by the striking contradiction of the results they obtain: while AFG predict that a fiscal consolidation is less recessionary if implemented through spending cuts, BCM reach the exact opposite conclusion. This contradiction originates from the different methodologies employed in the two papers, including the choice of sample and econometric model. Since clearly both papers provide profound and accurate analyses, we can infer that their results are not robust to a change in the methodology.[1] Continue Reading

“The government solution to a problem is usually as bad as the problem.” (M. Friedman)

The main arguments put forth by the “fiscal hawks” stem both from abstract principles of classical economics, and the observation of the current debt crisis that is battering the most profligate countries in the Eurozone.

Classical principles of economics hold that wealth is created through the efforts of individuals that compete with each other in the markets for goods, labor and capital. The continuous contrast between agents is what spurs them in increasing their productivity, thus producing higher and higher levels of wealth. Continue Reading

“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.” (J.M. Keynes, the General Theory) Continue Reading

This series of articles will try to shed some light on one of the most important issues in economics: which are the effects on the economy of a relative increase or reduction in public expenditures?

Every country in the world is endowed with a public sector that, to a differing extent, has the mandate and the power to extract resources by imposing taxes and by issuing public debt, and then to use the proceeds for a variety of purposes. Among these are public investments in capital goods (roads, ports, highways and so on), employment of public workers in goods- and services-producing industries, and direct expenditures on goods and services. With the above in mind, the term fiscal policy can be defined as the set of decisions taken by the government regarding its revenues and spending.

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