This paper is the latest version of austerity does not work:
As Simon Wren-Lewis says, if some positive growth, eventually, means that your policies have been successful, then a policy of simply shutting down half the economy for a year or two, then letting it start up again, is a smashing success.I am not going into the details of the paper, which I have read and understood. The problem for the paper is today, the sudden appearance of a spurt of growth across all the OECD economies, from China, Japan, the USA and Europe. None of these economies are well aligned with respect to the austerity/stimulus axis, but they all are part of the OECD, and not emerging markets. Japan just started its massive stimulus, China started, then abandoned austerity, Europe is three years into austerity, and the USA is six months into sequester and septaper. Yet they all see this sudden appearance of growth.
Nobody has ever said that austerity policies mean that the economy will never grow again. In fact, the standard view among Keynesians is that, unless there are strong hysteresis effects, the economy will eventually recover to its old growth trend even if austerity is never reversed — which means that somewhere along the way there will be some quarters not just of growth but of above-average growth. Actually, that dead-cat-bounce effect is an important factor in the new Jorda-Taylor analysis of austerity: they find that austerity tends to be imposed in depressed economies, and depressed economies have historically tended to recover, so the dead-cat bounce factor obscures the amount of damage the austerity policies really do.
The growth happened because of a global macro effect, which is ignored entirely in the paper. Thus, we are lead to consider that the paper in question did not isolate all variables cleanly. I don't blame the authors, I suspect that the technique they used will be refined and improved. But the method is not ready for prime time.
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