Deutsche Bank’s Thomas Mayer has weighed in on the debate between austerity and stimulus with an analytical take on what austerity actually means for the economy. Mayer’s conclusion:
We expect the planned reduction in structural deficits in major countries to be measured. Moreover, fiscal adjustment on balance seems to rely more on reductions in government spending than on tax increases (which should be positive for growth). As a result, we do not expect the economic recovery to be jeopardized by the planned fiscal adjustment. To the contrary, we believe there is a good chance that fiscal adjustment may even bolster the recovery.
That’s a bit contrarian compared to the typical discourse of this debate, which has merely suggested that we need more stimulus now, or we’ll have to suffer through more unemployment and perhaps a double-dip, or we need austerity now before bond markets wise up and target the U.S. government.
Mayer dismissed the typical Keynesian assumption that the dip in GDP growth in 1938 was a product of fiscal policy. He calls the GDP decline associated with recent austerity measures world wide, “hardly alarming,” as most are close to a 1% negative impact on GDP. In 1938, the impact was 5%. He doesn’t see any correlation between falls in GDP and fiscal austerity in the U.S. since the 1970s.
A study by the economists Alesnia and Ardagna, focusing on the period between 1970 and 2007, showed that in 24% of fiscal austerity periods, GDP growth accelerated in a survey of 21 OECD countries.They also pointed out that 22% of periods of fiscal stimulus ended up producing better GDP growth in the same survey. Mayer writes,
It is remarkable and in stark contrast to conventional wisdom that fiscal expansions were slightly less often associated with superior growth performance than fiscal contractions.