Does Austerity Promote Economic Growth? by Robert J. Shiller

NEW HAVEN – In his classic The Fable of the Bees: And Other Writings (1724), Bernard Mandeville, the Dutch-born British philosopher and satirist, described – in verse – a prosperous society (of bees) that suddenly chose to make a virtue of austerity, dropping all excess expenditure and extravagant consumption. What then happened?

The Price of Land and Houses falls;

Mirac’lous Palaces, whose Walls,

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Like those of Thebes, were rais’d by Play

Are to be let; . . . .

The building Trade is quite destroy’d

Artificers are not employ’d; . . .

Those, that remain’d, grown temp’rate strive

Not how to spend, but how to live . . .

That sounds a lot like what many advanced countries have been going through, after financial-crisis-induced austerity plans were launched, doesn’t it? Is Mandeville a genuine prophet for our times?

Fable of the Bees developed a wide following, and generated substantial controversy, which continues to this day. The austerity plans being adopted by governments in much of Europe and elsewhere around the world, and the curtailment of consumption expenditure by individuals as well, threaten to produce a global recession.

But how do we know if Mandeville is right about austerity? His research method – a long poem about his theory – is hardly convincing to modern ears.

Harvard economist Alberto Alesina recently summarized evidence concerning whether government deficit reduction – that is, expenditure cuts and/or tax increases – always induces such negative effects: “The answer to this question is a loud no.” Sometimes, even often, economies prosper nicely after the government’s deficit is sharply reduced. Sometimes, just maybe, the austerity program boosts confidence in such a way as to ignite a recovery.

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