Expansionary austerity theory relies on rational consumer expectations and shrinks to ever fewer cases.

Evidence

The original Giavazzi and Pagano paper from 1990 highlighted Denmark’s expansionary contraction in the period 1982–1986, claiming a political regime shift to the right, plus devaluation, plus a peg to the deutsche mark promoted growth. They were also “tempted” to say that the same applied to Ireland. Five years later Alesina and Perotti found fourteen successful adjustments in twenty countries over thirty-two years, with positive shifts in investors’ expectations, cuts on the expenditure side, and devaluations doing the work. These cases were more thoroughly examined in their article “Tales of Fiscal Adjustment,” in which the twenty-three positive episodes discerned in the data were narrowed down to ten case studies, of which, the authors concluded, “two cases appear unambiguously expansionary: Ireland 1987–9 and Australia.” Denmark, Giavazzi and Pagano’s best case now appeared to be a “mixed” result. Alesina and Ardagna’s main point was that “regardless of the initial level of debt, a large fiscal adjustment that is expenditure based and accompanied by wage moderation and devaluation is expansionary.” The 2009 update of this paper found nine examples of expansionary fiscal adjustments, and in every case “successful fiscal adjustments are completely based upon spending cuts accompanied by modest tax cuts.” The key channel for expansionary austerity to work, across all the cases, is the rational expectations of consumers. — Mark Blyth, Austerity, 559

Categorization

• DEFINE: Precisely lays out what the expansionary fiscal contractions literature claims and which cases it rests on.
• XREF: Connects to Mattei’s critique of austerity and to the broader New Consensus macro literature the reader is building out. — connects to: Austerity theory only holds in a special case unlike actual economies — Mark Blyth, Austerity: The History of a Dangerous…, 480; Expectations-based expansionary austerity theory rests on Denmark and Ireland cases — Mark Blyth, Austerity: The History of a Dangerous…, 457; Austerity’s success cases are few and possibly wrong while its failures are demonstrable — Mark Blyth, Austerity: The History of a Dangerous…, 479

Broader Connections

• Austerity theory only holds in a special case unlike actual economies #corroborates (0.95) — Mark Blyth, Austerity, 480
• Expectations-based expansionary austerity theory rests on Denmark and Ireland cases #expands (0.85) — Mark Blyth, Austerity, 457
• Austerity’s success cases are few and possibly wrong while its failures are demonstrable #corroborates (0.85) — Mark Blyth, Austerity, 479