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In Praise of Expansionary Fiscal Contraction

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  • Tim Congdon

Abstract

Textbook orthodoxy maintains that increases in the cyclically adjusted budget balance (i.e. reductions in the deficit) withdraw demand from an economy. Those Keynesian economists who believe that fiscal policy is the most powerful single influence on changes in demand expect ‘fiscal contraction’ to be accompanied by below-trend growth or even declines in output. This article, a response to Martin Wolf's 2013 Wincott Memorial Lecture, considers this Keynesian view. Using a database prepared by the International Monetary Fund, it shows that since the 1980s ‘expansionary fiscal contractions’ have been the norm and not the exception in the USA and the UK. Keynesian support for fiscal activism is unsupported by a large body of recent evidence.

Suggested Citation

  • Tim Congdon, 2015. "In Praise of Expansionary Fiscal Contraction," Economic Affairs, Wiley Blackwell, vol. 35(1), pages 21-34, February.
    • Handle: RePEc:bla:ecaffa:v:35:y:2015:i:1:p:21-34
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    File URL: http://hdl.handle.net/10.1111/ecaf.12110
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    References listed on IDEAS

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    1. Tim Congdon, 1992. "Reflections On Monetarism," Books, Edward Elgar Publishing, number 102, March.
    2. Martin Wolf, 2014. "How the Financial Crisis Changed Our World," Economic Affairs, Wiley Blackwell, vol. 34(3), pages 286-303, October.
    3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    4. Alberto Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 35-68, National Bureau of Economic Research, Inc.
    5. Tim Congdon, 2008. "Two Concepts of the Output Gap," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 9(1), pages 147-175, January.
    6. Blyth, Mark, 2013. "Austerity: The History of a Dangerous Idea," OUP Catalogue, Oxford University Press, number 9780199828302.
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