The ECB justified austerity through rational-expectations Ricardian consumer theory

Evidence

Following on the heels of the G20 communiqué came the ECB’s June 2010 Monthly Bulletin, which was an unabashed restatement of neoclassical economic ideas and a call for “growth friendly fiscal consolidation” going forward. In the Bulletin, “Ricardian consumers” with rational expectations who anticipated the effects of government policies years ahead went on display, alongside inflation-averse and confidence-sensitive investors appalled at the prospect of government “crowding out” investment, future inflation, and ever-larger government debts. As Stephen Kinsella argues regarding the seemingly contradictory logic of expansionary fiscal consolidation, “Proponents of this theory argue that fiscal contraction, rather than leading to a decline in output … will result in higher output … [as] consumers and investors anticipate long run tax deductions because of cuts in expenditure [which will] offset … the contraction.” Given this version of rational expectations theory, the ECB could only conclude that austerity had to be the way forward because “the longer-run benefits of fiscal consolidation are largely undisputed.” Undisputed, that is, so long as the question is posed only in terms of this narrow rational-expectations model. — Mark Blyth, Austerity, 174

Categorization

• DEFINE: Clearly explains the rational-expectations/Ricardian-equivalence logic that underwrites expansionary fiscal consolidation theory.
• XREF: The Ricardian-equivalence critique echoes both Keynes’s own refutation and Mattei’s account of how economic orthodoxy frames consolidation as self-evidently correct. — connects to: German Social Democrats were intellectually Marxist yet programmatically Ricardian in economics — Mark Blyth, Austerity: The History of a Dangerous…, 529; Rational expectations theory implies fiscal policy is neutralized when agents anticipate it — Mark Blyth, Austerity: The History of a Dangerous…, 126; Expectations-based expansionary austerity theory rests on Denmark and Ireland cases — Mark Blyth, Austerity: The History of a Dangerous…, 457 (+6 more)

Broader Connections

• Austerity rests on a fallacy of composition, not a confidence problem #contradicts (0.80) — Mark Blyth, Austerity, 45
• Austerity’s intuitive logic fails once distributional and aggregate questions are asked #contradicts (0.80) — Mark Blyth, Austerity, 41
• Economic theory reinforced the Italian austerity economists’ classist worldview #expands (0.80) — Clara E. Mattei, The Capital Order, 1162
• Expectations-based expansionary austerity theory rests on Denmark and Ireland cases #corroborates (0.75) — Mark Blyth, Austerity, 457
• Austerity treats citizens’ consumption as the cause of inflation to justify repressing demand #corroborates (0.75) — Clara E. Mattei, Escape from Capitalism, 349
• The ECB’s institutional design copied the Bundesbank’s neoliberal design #expands (0.75) — Dieter Plehwe, Quinn Slobodian & Philip Mirowski (eds.), Nine Lives of Neoliberalism, 636