Henry Farrell reviewed a new book called
Austerity: The History of a Dangerous Idea which sounds fascinating. It examines the odd fact that economists and politicians keep making the same mistake over and over again.
I like Farrell's colorful metaphor here:
Why did politicians ever think that austerity was a good idea in the first place? They should have known that it hadn’t worked in the past. Every few decades, politicians implement austerity programs in response to some economic shock, and every time, it is a disaster—from the gold standard crunches of the nineteenth century to the idiotic response of German Social Democrats to the Great Depression. And then, after a couple of decades, politicians begin to forget how bad it was. Blyth doesn’t have a complete explanation for this peculiar form of recurring amnesia. He does, however, have the beginnings of an intellectual history.
Blyth argues that austerity had its beginnings in the inability of classical liberal theorists like David Hume, Adam Smith, and John Locke to think straight about the state’s role in the economy. While their intellectual heirs recognized that economic crises happened, they thought of them as an inevitable hangover from previous economic exuberance. All that the state could do was balance the budget, and perhaps even raise taxes, to restore economic confidence. Under this theory, austerity was something like the apocryphal vomitorium at Roman feasts, allowing the economy to purge itself between successive bouts of overindulgence.
These arguments acquired ever fancier mathematical trappings. Economists came up with toy models under which austerity could actually expand the economy by restoring business confidence. And this general wisdom seeped down into politics. In 2009, Alberto Alesina and Silvia Ardagna wrote a paper arguing that austerity was a signal that politicians sent to entrepreneurs, guaranteeing that tax increases would not happen in the future so that they would have the confidence to invest in the present. When the crisis hit, they were invited to deliver a version of this paper to the gathered economics and finance ministers of Europe. Likely, many of these ministers now regret having listened to its recommendations, but the hurt is done.