BackCautionary fiscal tales
The core Keynesian insight that higher public spending can support effective demand is a sound one. But much depends on the underlying structural conditions
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Paul Krugman has recently claimed that the US economic recovery has strengthened because Barack Obama did not fall into the trap of austerity economics. Jeffrey Sachs has quite rightly pointed out that Krugman is on weak ground. Since mid-2011, Obama has chosen just the sort of fiscal austerity policies that Krugman has so noisily campaigned against. The UK is another country where a shrinking fiscal deficit been followed by a strong economic recovery. And then look at Japan: its massive public spending drives have done little to lift economic growth over the past two decades.
There is a cautionary tale here. The core Keynesian insight that higher public spending can support effective demand is a sound one. But much depends on the underlying structural conditions. Fiscal contractions can have expansionary effects. And fiscal expansions can fail. It is something that all those calling for higher fiscal deficits in India would to well to remember.
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